No. Software as a service (SaaS) is not taxable under Wisconsin’s current sales and use tax laws. According to the Wisconsin Department of Revenue, SaaS would typically fall into a nontaxable category known as “data processing services.” However, certain digital goods and electronically delivered software may be subject to tax.
| SaaS | |
|---|---|
| Digital Goods | |
| Confused? | Talk to us -> |
| Sales | $100,000 |
|---|---|
| Transactions | N/A |
| Physical? |
| Wisconsin | 5.00% |
|---|---|
| Average Total Rate | 5.70% |
| Local Rates Apply |
This article will explain how Wisconsin’s taxation policies may affect providers of SaaS and some other digital goods.
In Wisconsin, SaaS is not subject to sales tax because it is classified as a nontaxable service, rather than as tangible personal property. This is according to official guidance from the Wisconsin Department of Revenue that covers the sales and use tax treatment of computer hardware, software, and services.
In this guidance, Wisconsin states that SaaS involves the remote access of software hosted on a vendor’s servers, which means that it is defined as a data processing service under state law. To remain nontaxable, SaaS must meet the following conditions:
Wisconsin’s sales tax rules generally apply whether a SaaS transaction is business-to-consumer (B2C) or business-to-business (B2B). The state is more concerned with the nature of the product, where it is used, and where it is delivered. For SaaS, tax exemptions are maintained when the provider controls the software and servers. However, sales of prewritten software and other digital goods can be subject to tax.
Wisconsin does not currently tax SaaS, and it has not announced plans to do so in the future; however, it does tax certain digital goods at a rate of 5%. Digital goods that are subject to tax include:
SaaS that is bundled with goods like these or other taxable components may also be subject to tax. If downloadable software is offered along with a SaaS product, the entire transaction could become taxable unless each portion is explicitly separate. Taxability can also be determined by other factors, such as nexus.
The term “nexus” typically refers to a connection to a state that creates a tax obligation. In Wisconsin, there are two types of nexus to consider: physical and economic.
It’s important to note that establishing nexus in Wisconsin does not necessarily mean a provider will need to pay sales and use tax. Nexus is just one of several factors that need to be considered by companies who do business in Wisconsin.
Although SaaS providers with customers in Wisconsin may not be required to collect sales tax, many other states do consider SaaS taxable. Companies that do business in multiple states must understand taxation laws and procedures in all the regions where they do business. For example, states near Wisconsin that classify SaaS as taxable include:
Staying up-to-date and complying with the tax laws in all the jurisdictions where you do business is important. To stay compliant, providers will also need to follow specific procedures and follow the guidance provided by each state’s taxation authority.
While compliance procedures not only vary by state but also may vary by city, county, borough, or parish, there are several steps that most jurisdictions require.
If these and the many other components of compliance are not taken care of, SaaS providers may experience significant consequences. Noncompliance can lead to penalties, interest, and an increased risk of audits. In some cases, providers may lose their business license and ability to operate in a state. To avoid these consequences, it can be helpful to use a tax compliance platform like Numeral, alongside resources provided by each state’s taxation authority.
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Wisconsin provides an array of resources for companies that can guide them through their compliance standards and procedures, including:
The Wisconsin Department of Revenue’s business service line can be reached at 608-266-2776. Their call center is open Monday through Friday from 7:45 a.m. to 4:30 p.m. Central Time.
While SaaS is not currently subject to sales and use tax in Wisconsin, certain digital goods are. These digital goods include prewritten software (regardless of delivery method), digital media (including movies, music, e-books, and games), and software maintenance contracts involving electronic or physical updates.
Even if their products or services are not taxed in Wisconsin, SaaS providers may need to collect and remit sales tax in other states. Understanding whether you have a tax obligation can start by determining nexus, which is established when a business meets certain physical or economic requirements within a state.
While the exact process can vary from state to state, compliance typically involves registering with the state’s taxation authority, calculating the correct tax rate, collecting taxes on each transaction, and delivering regular tax returns and remittances to the state. These and many other aspects of compliance may be simplified by using a platform like Numeral, as well as resources provided by each state’s taxation authority.
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