Yes, software-as-a-service (SaaS) is typically taxable in Connecticut. The rate at which SaaS is taxed depends on how it is used and the type of service it provides.
| SaaS | |
|---|---|
| Digital Goods | |
| Confused? | Talk to us -> |
| Sales | $100,000 |
|---|---|
| Transactions | 200 |
| Physical? |
| Connecticut | 6.35% |
|---|---|
| Average Total Rate | 6.35% |
| Local Rates Apply |
SaaS that is used for non-business purposes is subject to Connecticut’s standard statewide sales and use tax of 6.35%. SaaS purchased for business use, however, is taxed at a reduced rate of 1%.
Other factors, such as nexus, can also impact taxability (more on nexus later in this article). To remain compliant, SaaS businesses need to understand these factors and the general taxation rules in Connecticut.
As of October 1, 2019, Connecticut classifies many forms of SaaS as tangible personal property, which are taxable at the statewide 6.35% sales and use tax rate. These changes were made as a result of Connecticut’s Public Act No. 19-117. Prior to October 1, 2019, SaaS was taxed at the 1% rate for computer and data processing services.
Per a special notice released by the Connecticut Department of Revenue Services, only SaaS sold to a business for use by that business (also known as a business-to-business or B2B sale) will continue to be taxed at that 1% rate.
Nexus is a physical presence or a level of economic activity in a state. Many states have nexus thresholds, or requirements, that determine whether a business is obligated to collect sales tax. In Connecticut, the thresholds for nexus are:
It is important to note that not all states still use a transaction threshold when determining economic nexus. Many states, including North Dakota and Indiana, have removed their transaction count thresholds and now rely solely on revenue to simplify compliance for businesses operating in the state.
Even if a SaaS provider has nexus in Connecticut, certain transactions may qualify for tax exemptions or reduced rates. These exemptions are typically related to whether the SaaS is used for business or personal purposes.
Certain exemptions and reduced rates in Connecticut can apply to SaaS that is used in a specified way. For example, SaaS purchased by businesses for business purposes is taxed at a reduced rate of 1% instead of the standard rate of 6.35%.
Services that provide access to online professional or academic research databases may also qualify for the reduced 1% rate. Additionally, Connecticut outlines rules for SaaS resale transactions. If SaaS is purchased for resale, businesses can claim exemptions if they can prove the SaaS was resold unaltered to an end consumer.
Along with changing the taxation rules for SaaS in 2019, Connecticut also changed the taxability of digital goods. According to Special Notice 2019(8), certain digital goods are considered tangible personal property and taxed at the standard 6.35% rate.
This applies to digital goods that are electronically accessed or transferred, whether they are sold as subscriptions, through in-app purchases, as codes granting access to digital products, or through individual sales. Examples of taxable digital goods include:
However, certain sales of digital goods are exempt from sales and use tax. These include sales of subscription-based magazines or newspapers and digital versions of college textbooks.
As of this writing, Connecticut does not impose additional sales taxes at the city or county level. So taxable SaaS transactions are subject only to the state-level sales tax of 6.35%. However, the reason a specific SaaS product is purchased and used can affect the applicable tax rate.
For example, let’s say a SaaS provider that has nexus in Connecticut sells a $2,000 subscription to a customer located in the state’s capital city, Hartford. The amount of tax the provider must collect depends on whether the customer is using the product for business or personal purposes.
Although the lack of local sales tax rates can simplify the process, providers will still need to carefully track whether transactions are B2B or B2C to apply the correct tax rate. This is just one of several steps that companies will have to take in order to remain compliant in Connecticut.
Although compliance requires keeping track of numerous aspects and rules, SaaS providers operating in Connecticut will typically need to follow these key steps:
SaaS companies also need to consider other aspects of compliance, such as deregistration for businesses that no longer meet nexus thresholds or voluntary disclosure agreements (VDAs) for those with unpaid or uncollected taxes. Failure to adhere to compliance standards can have a variety of negative consequences, including penalties, interest charges on unpaid taxes, and an increased risk of audits.
To simplify compliance and reduce risks, SaaS providers may benefit from using a compliance platform such as Numeral alongside resources from the state of Connecticut.
[inline-cta title="Let us worry about sales tax." text="The trusted solution for U.S. sales tax, VAT, and GST compliance, used by 3,000+ global businesses. " button="Get started for free" button-link="/get-started"]
There are several resources provided by the Connecticut Department of Revenue Services that can help SaaS providers remain compliant in the state. These include:
The Department of Revenue can also be reached directly by emailing DRS@ct.gov or by calling 1-860-297-5962 or 1-800-392-9463. Business hours for the department are 8:30 a.m. to 4:30 p.m., Monday through Friday.
While SaaS transactions in Connecticut are typically subject to tax, the rate depends on how the service is used. For SaaS sold to businesses for business purposes (B2B transactions), a reduced tax rate of 1% applies. For SaaS purchased for personal use (B2C transactions) the standard statewide tax rate of 6.35% applies.
Nexus, whether it be physical or economic, determines whether a SaaS provider must collect and remit these taxes. In addition, certain exemptions, such as those for research databases or SaaS purchased for resale, can further affect taxability.
To remain compliant, SaaS providers need to register with the state, calculate the appropriate tax rate, collect taxes during transactions, and file and remit these taxes accurately. Tools like Numeral and resources from the Connecticut Department of Revenue Services can help simplify these processes and reduce the risk of penalties or audits.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.
