Sales tax on software: A guide for SaaS and plugin makers selling globally

You can sell the same software subscription to two customers and owe different tax on each sale.

The rate may change by US state or country. Your obligations may also depend on whether the buyer is a business or consumer, whether your product is taxable there, and whether your sales have crossed a registration threshold.

That makes sales tax on software difficult to manage once you start selling across multiple markets — even when your subscription revenue itself is predictable.

This guide explains how sales tax applies to SaaS, plugins, and other subscription software, when nexus creates an obligation to collect it, and how VAT and GST work for international sales. It also covers the practical options for managing compliance yourself or using a merchant of record.

TL;DR: What software sellers need to know about sales tax on software

• Sales tax on software is the tax applied to SaaS, plugins, apps, downloads, and other digital products. Whether it applies depends on your customer’s location and how the specific jurisdiction classifies the product.
• Economic nexus means your sales into a US state can create a tax obligation even if you have no office or employees there. Since the 2018 Wayfair decision, many states can require remote sellers to collect sales tax after crossing a revenue threshold.
• SaaS is not taxed consistently across the US. Some states tax it, some exempt it, and others apply different rules based on factors such as business use, software type, or local jurisdiction.
• International sales usually fall under VAT or GST instead of US-style sales tax. These systems often depend on the customer’s country, whether the sale is B2B or B2C, and whether the buyer has a valid tax registration number.
• Managing tax yourself keeps the responsibility with your business, even when tax software or an accountant handles parts of the process.
• Using a merchant of record shifts that responsibility to the provider, which becomes the legal seller and handles tax collection, filing, remittance, and liability.
• Freemius combines merchant-of-record tax compliance with payments, subscriptions, and software licensing, giving software businesses one system for selling globally.

What is sales tax on software?

Sales tax on software may apply to SaaS, downloadable apps, plugins, and other digital products, depending on the customer’s location and how that jurisdiction classifies the product. Unlike tax on physical goods, it does not follow one consistent rule because software is intangible and each jurisdiction treats it differently.

That inconsistency plays out differently depending on where you’re selling:

• In the US, taxability is decided state by state. Some states tax all digital products, some only tax software with a physical-media equivalent, and some don’t tax SaaS at all
• Internationally, each country sets its own VAT, GST, or similar consumption-tax rules for digital services, including its own registration thresholds and filing requirements

Most sellers already know they owe tax somewhere. What trips makers up is the specifics: which states or countries apply, at what threshold, and what changes if a customer’s location or business status shifts. Getting it wrong can mean penalties, back interest, and — in serious cases — legal exposure, on top of the damage incorrect charges do to customer trust.

Is your software taxable in the US?

Whether you need to charge sales tax in the US depends on three things:

1. If you have nexus in a state
2. Which state your customer is buying from
3. What type of software you sell

Software tax nexus explained

Software tax nexus is the legal connection that gives a US state the right to require your business to collect sales tax. If you have nexus in a state where your software is taxable, you may need to register, collect sales tax, and file returns.

There are two ways to establish nexus:

• Physical nexus — a tangible presence in a state, such as an office, warehouse, or employee
• Economic nexus — crossing a sales or transaction threshold in a state, even with zero physical presence there

Economic nexus is the one that catches many software sellers off guard.

Before 2018, a state could generally require an out-of-state business to collect sales tax only if it had a physical presence there, such as an office, employee, or warehouse.

That changed after the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc.. States can now require remote businesses to collect sales tax based on their sales into the state, even if they have no physical presence.

Many states set this threshold at $100,000 in annual sales, but the rules aren’t the same everywhere. Some states measure gross sales, others count only taxable or retail sales, and a smaller number still include a transaction threshold. Always check each state’s specific rules, threshold, and measurement period.

Which states charge sales tax on SaaS?

There isn’t a single US rule for SaaS sales tax. Each state decides whether SaaS is taxable, which means the same product can be taxed in one state and exempt in another.

A few examples:

• California: SaaS is generally not taxable today. However, starting January 1, 2027, most prewritten software (including SaaS) will become taxable, with some exceptions.
• Iowa: SaaS is taxable at the state’s 6% sales tax rate, and local sales tax may also apply. Some business purchases may qualify for an exemption when the buyer provides the required documentation.
• Florida: SaaS is generally not taxable when delivered electronically or accessed online. Different rules may apply if it’s sold as part of a bundle with taxable products or services.

Is SaaS taxable — State by state breakdown

SaaS taxability, exemptions, and local rules change over time, so check the current treatment of your product in every state where you have nexus.

Does your software type affect taxability?

Even in a state that taxes SaaS, what you’re selling can still change whether a specific sale is taxable.

• Business vs. personal use. Several states tax SaaS differently depending on who’s buying. Iowa is one example — business purchases are exempt with a certificate on file, personal ones are taxed at the full rate. This distinction can make a sale non-taxable even in a state that taxes SaaS by default.
• Custom vs. prewritten software. Custom software built for a specific client is often treated as a non-taxable service, even in states that tax SaaS generally. Prewritten (off-the-shelf) software is more likely to be taxed regardless of delivery method. This is not universal: Iowa, for example, taxes custom software in the same manner as prewritten software.
• Category-specific exemptions. Some states exempt specific categories outright: educational software and certain business software are common examples. These exemptions vary enough by state that they’re not safe to assume without checking.

One more wrinkle: collecting tax is your responsibility as the seller, but a few jurisdictions also impose “use tax” directly on the customer for untaxed purchases. This is worth knowing if a customer ever asks why they weren’t charged.

Tax obligations outside the US

Selling outside the US brings a different framework entirely. Most of the world uses value-added tax (VAT) or goods and services tax (GST) instead of sales tax. Rules vary as much country to country as US sales tax does state to state, so it’s worth treating each major market on its own terms.

EU VAT

VAT applies to digital services — including SaaS — sold to EU customers, charged at the rate of the customer’s country. Whether you owe VAT depends heavily on the type of transaction you’re making, but if you’re a non-EU seller, you’re required to register regardless of volume.

B2C and B2B sales follow different VAT rules: Sell to a consumer, and you collect and remit VAT yourself, at their country’s rate. Sell to a VAT-registered business, and the reverse charge mechanism applies instead. The customer reports the VAT themselves, and you don’t add VAT to the invoice.

The €10,000 threshold only applies to some EU businesses: Businesses established in one EU country can apply a €10,000 annual threshold to its combined cross-border B2C digital sales and distance sales within the EU. Non-EU sellers do not qualify for this threshold, so VAT can apply from the first eligible sale to an EU consumer.

OSS simplifies compliance: Instead of registering for VAT in every EU country where you have customers, the One-Stop Shop (OSS) lets you register once and submit a single VAT return covering your EU B2C sales.

VAT rates depend on the customer’s country: Each EU country sets its own VAT rate. For example, France charges 20% VAT and Italy charges 22%, so always check the rate that applies where your customer is located.

UK VAT

After separating from the EU, the UK operates its own VAT system. UK and EU VAT registrations, thresholds, and filings are no longer linked, so selling in both means treating them as two distinct compliance obligations.

Thresholds depend on where you’re based: UK businesses only need to register for VAT once their taxable turnover exceeds £90,000. Businesses based outside the UK don’t get this threshold. If they make taxable digital sales to UK customers, they need to register and charge VAT from the first sale.

B2C and B2B sales are treated differently: When selling digital services to UK consumers, overseas sellers usually charge and remit UK VAT. When selling to UK businesses, the reverse charge may apply, meaning the customer accounts for the VAT instead.

There’s no UK equivalent to the EU’s OSS for non-UK sellers, so if you owe UK VAT, you register directly with HMRC.

Australia GST

Since July 1, 2017, Australia’s GST has applied to digital products and services sold by overseas sellers to Australian consumers. Before that rule, offshore sellers had a real price advantage: the same purchase from a local Australian provider was taxed, while a nearly identical one from overseas wasn’t.

The 2017 change brought overseas sellers into the same GST system Australian businesses had already been using since 2000.

The registration threshold is A$75,000 per year: If your Australian sales stay below this amount, GST registration is optional. Once you exceed it, you generally need to register, charge GST, and remit it at the standard 10% rate.

Australian consumers are the main target of the imported-services rules: An overseas seller generally does not charge GST when the buyer provides a valid Australian Business Number and confirms that it is registered for GST, although the seller must retain the required evidence.

Registration is simplified for non-resident sellers: The Australian Taxation Office (ATO) offers a simplified GST registration specifically for overseas businesses, though sellers using it can’t claim input tax credits on their own Australian purchases.

Other notable markets

Beyond the EU, UK, and Australia, several other markets tax digital services sold by foreign businesses — some with no minimum sales threshold at all.

Some countries provide no meaningful registration threshold for non-resident digital sellers. In those markets, an initial taxable consumer sale may create an immediate registration and collection obligation. Verify the current rules and any platform-specific treatment before selling directly.

Why managing software tax is so complicated

Sales tax and VAT on software are complicated because the rules never stay fixed, and every market you sell into changes on its own schedule. The US alone has over 11,000 sales tax jurisdictions, and the EU, UK, and dozens of other countries run their own VAT and GST systems independently. Something accurate today isn’t guaranteed to be accurate next quarter.

For a subscription software business, that instability creates several practical problems:

• Rates, thresholds, and taxability rules change — sometimes more than once a year in the same jurisdiction
• Your customer’s jurisdiction changes. A customer moves, and their tax obligation moves with them, whether that’s crossing a US state line or relocating to a different VAT country entirely
• A customer’s status changes. Someone who bought as a consumer starts buying as a registered business, or an exemption they had no longer applies

Each of these forces the same chain reaction: your payment processor and billing system need to be updated, affected subscriptions need to be identified in both your platform and your processor, and customers need to be told why their price changed.

At any real scale, this has to happen automatically — recalculating renewals by hand isn’t sustainable once you have more than a handful of active subscriptions.

But automation is only as good as the data underneath it, and how you store billing information determines whether that automation gets it right.

Say you store billing information per customer rather than per subscription. A customer subscribes from France, then relocates to Germany and buys a second subscription there with a German card and billing address — same account, two subscriptions.

If France raises its VAT rate, a system keyed to the customer could flag both subscriptions for the increase, incorrectly raising the price on the German one too.

Storing billing data per subscription avoids this. Each subscription carries its own billing address, so a French VAT change only touches the French subscription. The German one is untouched, because it was never tied to the same record in the first place.

Proactive vs. reactive: Two approaches to software compliance

You can manage tax changes proactively by updating affected subscriptions before a new rule takes effect, or reactively by checking for changes at renewal. The right approach depends on your subscription volume, the number of jurisdictions you sell into, and how much compliance risk you are prepared to carry.

The proactive approach to software compliance

A proactive approach means identifying tax changes early and updating affected subscriptions before they take effect.

In 2020, Germany temporarily reduced its standard VAT rate from 19% to 16%. Sellers needed to identify affected German subscriptions, update them before the change took effect, and reverse the adjustment when the rate returned to 19%. That is the practical value of a proactive system: it isolates the subscriptions affected by a rule change before customers are billed incorrectly.

The tradeoff is the ongoing work:

• Monitoring: Track rate changes, new obligations, and exemptions across every relevant jurisdiction.
• Customer communication: Warn customers before a tax change affects their next payment.
• Compliance risk: Late or incorrect filings can still lead to penalties and interest. And even sellers who try to stay ahead of changes can slip.
  In Texas, for example, a payment made 1–30 days late carries a 5% penalty, rising to 10% past 30 days, plus interest on top. Rules like these vary by state, but the pattern (penalties that scale with how late you are) is common across many of them.

The reactive approach to software compliance

A reactive approach checks tax treatment at renewal instead of updating subscriptions as soon as a rule or customer detail changes. It requires less ongoing monitoring, but delays corrections until the next billing event.

The risk lives in the gap between renewals.

If a regulation changes or a customer relocates mid-subscription, a reactive process won’t catch it until the next renewal, which can mean undercharging or overcharging in the meantime. It also leaves you less time to warn customers before a change hits their bill, raising the odds of confusion or a support ticket.

Choosing between proactive and reactive comes down to three factors:

• Subscription volume: Manual checks may work for a small customer base but become difficult at scale.
• Customer impact: A missed update on a single $20/month subscription is a minor correction. The same miss across a whole jurisdiction means back-charges or refunds at scale, and a lot more customers asking why their bill changed.
• Available resources: Proactive monitoring costs more upfront, while reactive compliance can create higher remediation costs later.

The right answer is usually a balance: enough proactive monitoring to catch what matters, without over-investing in tracking every jurisdiction with equal intensity.

Calculating sales tax on your software subscriptions: 7 steps

If you decide to manage software tax yourself, the process starts with identifying where you have an obligation and ends with filing, remittance, and ongoing monitoring. Here are the seven steps involved.

1. Map your sales tax landscape

It all starts with understanding your tax obligations in each state or country you serve. If you sell to EU customers, determine whether each transaction is B2C or B2B, which country’s VAT rules apply, and whether you must charge VAT or apply the reverse charge. Sales tax regulations vary widely by location, so this can be a complex task. Consider consulting a tax professional to ensure you’re on the right track.

2. Pinpoint your customers

Nexus determines where you may have an obligation to collect tax, while the customer’s location generally determines which rate and local rules apply to the sale. You can do this manually, but for businesses with customers in multiple jurisdictions, automated solutions can save time and minimize errors.

3. Calculate the numbers

Once you know the tax rate for your customer’s location and the subscription price, it’s time to calculate the sales tax amount. This might involve some complex calculations if you offer bundled services or have customers in multiple tax jurisdictions.

4. Collect from your customers

Transparency is key. Clearly display the sales tax amount during checkout or include it in the subscription fee. In some countries, like Australia, you’re required to be transparent by local law. Avoid revealing the tax only at the final step of checkout. An unexpected increase in the total can cause customers to abandon the purchase.

5. File sales tax returns on time

The frequency of sales tax filing depends on your business’s total sales volume within each jurisdiction. Some countries require monthly filing, while others allow for quarterly or even annual filings for businesses below a certain threshold. Research the specific requirements for each jurisdiction where you sell your subscriptions.

6. Keep detailed records

Maintaining meticulous records of your sales tax collections is essential. Here’s what you should keep:

• Receipts or invoices with information about your business, customer, date of purchase, amount of sales tax, etc.
• Refund documentation, including credit notes

7. Stay vigilant

The work doesn’t stop there. Monitor your sales activity across locations to see if you’ve surpassed nexus thresholds. Exceeding these thresholds might trigger additional filing and remittance requirements.

Handling tax yourself vs. using a merchant of record

There are two ways to handle sales tax and VAT compliance for your SaaS or software subscriptions: manage it yourself using the steps mentioned above, or use a merchant of record (MoR) that takes it on for you.

Managing it yourself means owning each of those seven steps, in every market you sell in. In the US, that means registering for a sales tax permit in every state where you have nexus and taxable sales, then filing returns on each state’s schedule.

Internationally, the process repeats on its own terms: EU-based sellers register once for VAT OSS to cover cross-border B2C sales across the whole bloc, UK VAT requires separate registration with HMRC, and Australia’s GST offers a simplified registration path for non-resident sellers.

Each system has its own thresholds, forms, and filing cadence, and none of them talk to each other — a US sales tax registration doesn’t help you in the UK, and vice versa.

Across all of these, you’re also tracking rate and rule changes as they happen and keeping your payment processor updated so it applies the correct rate on every transaction, everywhere you sell.

In practice, few SaaS businesses do all of this by hand. Most rely on some combination of:

• Tax automation software that calculates rates and files returns across jurisdictions automatically.
• Official government resources — most states and countries publish their own tax rules directly (you can search “[state/country] Department of Revenue”), and in the US, the Federation of Tax Administrators maintains a directory of every state tax agency.
• A tax professional, especially for edge cases. Someone familiar with SaaS-specific rules can also advise on legally minimizing your tax burden through product or service structuring, not just staying compliant.

Even with all three, the responsibility and liability stay with you. If a filing is late or a rate is wrong — in the US or abroad — it’s your business on the hook.

A merchant of record takes that responsibility off your business. It becomes the legal seller, handling tax calculation, collection, filing, and remittance across the markets where it operates. If a rate is applied incorrectly or a filing is missed, the MoR carries the liability.

Freemius applies this model specifically to software sales.

How Freemius handles sales tax on software

As the merchant of record, Freemius determines the applicable tax at checkout, collects it from the customer, and remits it to the relevant authority.

At checkout, Freemius uses the customer’s IP address to identify their likely country and display the applicable tax. The customer can then confirm or change the billing country, with the final tax treatment determined by the billing information they provide.

Freemius also:

• applies EU B2B reverse charge where the buyer qualifies
• issues the required tax documentation
• monitors changes to tax rates and regulations
• updates affected subscriptions when tax rules change

Freemius checks subscription billing addresses against its tax-rate database to identify affected renewals, then notifies customers before the new rate is applied.

Take software tax compliance off your roadmap

Every new state or country you sell into can add another threshold to monitor, registration to manage, return to file, and tax rule to keep current. That burden grows with your revenue and pulls time away from product, customers, and growth.

Freemius removes that operational layer. As your merchant of record, it handles sales tax, VAT, and GST across the markets where you sell, while also bringing payments, subscriptions, software licensing, invoicing, and Customer Portal into one system.

That means you can expand globally without building a separate tax operation or stitching together the commercial stack around your product.

Ready to sell globally without managing tax compliance yourself? Reach out to our team to start selling with Freemius.

Frequently asked questions about sales tax on software

What is software tax nexus?

Software tax nexus is a connection between your business and a US state that can create an obligation to register, collect, and remit sales tax on taxable sales there. It can be created by a physical presence, such as an employee or office, or by exceeding a state’s economic nexus sales threshold.

Do software subscriptions create nexus?

Software subscriptions can contribute to economic nexus because recurring revenue counts toward a state’s sales threshold. The subscription model itself does not create nexus, but enough sales into a state can. Employees, offices, and other physical activities may also create nexus.

Which US states charge sales tax on SaaS?

SaaS is generally taxable in states including New York, Pennsylvania, Tennessee, and Washington, while Texas taxes a portion of qualifying data-processing charges and Florida generally exempts standalone remotely accessed software. Other states apply conditional, local, or B2B-specific rules. Other states apply conditional, local, or B2B-specific rules, so sellers should verify the current treatment of their product in every state where they have nexus.

How do I handle US sales tax as a plugin or SaaS seller?

First, identify the states where you have physical or economic nexus. Then determine whether your product is taxable, register where required, collect the correct tax at checkout, file returns, and remit the tax collected. Tax software can automate parts of the process, while a merchant of record can handle it for you.

Who handles VAT for software sales?

The legal seller is responsible for handling VAT. If you sell directly, your business must register, calculate, collect, file, and remit VAT where required. If you use a merchant of record, the MoR becomes the legal seller and handles VAT on the transaction.

What is the difference between a merchant of record and a payment gateway for tax purposes?

A merchant of record is the legal seller and takes responsibility for collecting and remitting applicable sales tax, VAT, and GST. A payment gateway only helps transmit payment information. It does not normally register, file tax returns, or take tax liability away from the software seller.

How can I automate software VAT and sales tax compliance?

You can automate tax compliance by connecting tax software to your payment system or by using a merchant of record. Tax software can monitor thresholds, calculate tax, and assist with filing, but the seller usually remains responsible. A merchant of record takes over the tax obligation as the legal seller.

Is all software subject to sales tax?

No. Software taxability depends on the jurisdiction, product type, delivery method, and customer. SaaS, downloadable software, custom software, plugins, and digital services may all be treated differently. Some jurisdictions also provide B2B, educational, or custom-software exemptions.

Do B2B software sales include VAT or sales tax?

Sometimes. In many VAT systems, qualifying B2B sales use the reverse charge, so the customer accounts for the VAT. In the US, B2B software may still be taxable unless a state provides a business-use exemption. The seller usually needs valid documentation before treating a sale as exempt.