Software as a Service: Is it a Nontaxable Service?

Many non-state and local tax experts mistakenly believe that subscription charges for Software as a Service ("SaaS"), are not taxable because SaaS is the provision of services. However, there are many states that treat SaaS as taxable. See, e.g., New York TSB-A-11(17)S (June 1, 2011). Fortunately, the majority of states do not tax SaaS. Recently, the Georgia Department of Revenue published an opinion that the provision of SaaS is not taxable, because it does not include the transfer the personal property on a physical medium. See Georgia Letter Ruling SUT No. 2014-02-20-01. Thus, while pre-written software is generally taxable as tangible personal property in Georgia, the Georgia Department of Revenue requires that the transfer take place on a physical medium, such as a diskette or CD, in order to be taxable. Several other states have adopted a similar analysis. The mistake, however, is to believe that such a position is universal among the states. It is not.