Companies entering or operating in the US need to recognise and understand their sales and use tax (SUT) compliance obligations. Unlike indirect tax regimes in other countries that apply at the national level, such VAT or GST, the US has 45 states (and the District of Columbia) that impose sales tax. Each state has its own sales tax rules for determining nexus, requirements for registration, taxability of products and compliance.
This fragmented environment creates unique challenges for companies, especially those operating in the technology sector and selling software, software as a service (SaaS), online education and access to digital information. For example, jurisdictions may classify SaaS as taxable tangible personal property, a lease or a data processing service. States may also provide for specific exemptions, such as exempting SaaS purchased for business use (Iowa) or imposing tax at a reduced rate (Maryland). Similarly, access to online courses, live presentations or subscription-based information services can fall into different tax categories depending on the state’s definitions and sourcing methodologies.
With the beginning of 2026, companies especially those offering software, digital products, access to information and similar services, should consider taking proactive steps to strengthen their US SUT compliance.
The first priority for inbound companies is to understand where they have sales tax nexus. Nexus refers to the level of connection, which can be physical and/or economic, with a state that requires a company to register, collect and remit sales tax.
Physical nexus can be established by hiring US-based sales force or implementation consultants, attending trade shows or conferences, visiting customers, having an office or warehouse or holding title to inventory.
Economic nexus can be established without engaging in any physical activity in a state if the company’s sales activity exceeds a threshold (e.g., USD 100,000 in sales and/or 200 transactions), generally measured in the previous or current year. Measurement of volume of sales depends on state-specific methodologies that include counting all sales, gross receipts, retail sales or taxable receipts, including or excluding marketplace sales. In practice, we find that companies engaged in e-commerce, software or digital sales—even those with only a few hundred thousand dollars in sales across various US states—are likely to meet these thresholds, resulting in sales tax compliance obligations in multiple states. While some states may provide grace periods for registration (e.g., Alabama, Pennsylvania), many require registration and collection of tax the first calendar month after the month in which they meet the threshold (e.g., Maryland, Oklahoma).
It is important to remember that nexus can be established through physical activity before economic nexus thresholds are reached and continue after sales or transactions fall below the required thresholds.
Failure to identify nexus in a timely manner can result in several years of back-tax exposure, interest and penalties. Completing this review before year-end provides an opportunity to proactively correct course and address past issues—ideally before the state contacts the company.
Determining taxability is challenging because each state defines digital goods, information services, data processing and SaaS differently. Taxability analysis is important for the following reasons:
Louisiana
Louisiana has imposed sales tax on SaaS since 1 January 2025, which typically involves charging customers for access to prewritten software owned by the seller or a third party, regardless of the fee structure. However, administrative guidance indicates that access to taxable SaaS may exist in less obvious scenarios. For example, a website that allows employers to post job openings online for a fee, while enabling job seekers to search, view and apply for these positions, is considered a taxable SaaS. In addition, Louisiana began to impose sales tax on digital products defined broadly to include digital audiovisual and audio works, books, codes, apps and games, periodicals, discussion forums and any other taxable tangible personal property transferred electronically—whether delivered, streamed, accessed or purchased by subscription, including maintenance, updates and support.
Louisiana began imposing sales tax on information services, including electronic data retrieval or research, and the collection, compilation, analysis or furnishing of information—such as general or specialised news, other current information or financial data—by print or electronic means. Information services include providing access to information through databases and subscriptions such as financial market and credit reports, pharmaceutical market research data, legislative tracking, weather alerts, sales lead generators and similar services.
Louisiana provides for an exemption from sales tax for SaaS, digital products and information services when they are purchased exclusively for commercial use, directly used in producing taxable goods for sale to customers, and goods and services produced are subject to SUT or insurance premium tax. For purposes of their commercial production exemption, “used directly” means a digital tool is essential and directly contributes to creating, developing or producing a final product or service for sale. Tools used for business management, planning, communication or analysis that do not directly transform inputs into salable goods or services do not qualify. Similarly, digital tools that improve efficiency or productivity—such as project management software, inventory systems, accounting programs, performance dashboards, CRM tools or communication platforms—are not used directly in production and are not exempt.
An exemption is also available for FDIC-insured financial institutions for storing, transmitting, processing or analysing customer and account information, facilitating transactions, account processes, investment processes, lending processes, or security and compliance. Further, an exemption applies if software is used by licensed healthcare facilities or providers for storing or transmitting healthcare information or for diagnosing or treating medical conditions.
Maryland
On 1 July 2025, Maryland introduced a tax at a reduced rate of 3% on sales of SaaS, data and information technology services for business-to-business transactions, as defined by reference to North American Industry Classification System sectors. Maryland now imposes sales tax on system software or application software publishing services (NAICS Code 5132), as well as sales of data or information technology services, including data processing, hosting and related services (NAICS Code 518), other information services (NAICS Code 519) and computer systems design and related services (NAICS Code 5415).
In determining taxability, a business’s primary activity code reported for federal and state income tax purposes does not determine whether its services are subject to Maryland SUT. Instead, businesses must compare the services they provide to the NAICS activity descriptions for data or information technology services and software publishing, as defined by Maryland law, to assess taxability.
Maryland’s administrative guidance provides examples of services that may be subject to tax, even if this is not immediately clear from the NAICS Code descriptions. For example, Maryland interprets NAICS Code 518 to include taxable activities such as cryptocurrency mining, media streaming support, infrastructure as a service and platforms as a service. For compliance purposes, companies should review the published examples in the guidance to determine if their services are considered taxable.
Taxable products purchased for individual consumption—meaning they are not purchased for exclusive use in business—are subject to a higher 6% tax. This means that SaaS sold for individual use is taxed at the 6% rate, and the same SaaS is taxed at the 3% rate when sold for use in an enterprise computer system.
The new law clarified that sales of taxable products noted above between affiliated companies are subject to tax, unless another exemption applies, such as sales for resale. In addition, effective 1 July 2025, the exemption for customised, configured or modified software or SaaS is repealed.
Washington
Effective 1 October 2025, Washington significantly broadened the scope of its retail sales tax to include several categories of services delivered digitally or electronically, such as information technology training, technical support, data processing, advertising services and similar offerings.
Advertising services subject to tax include all digital and non-digital activities related to the creation, preparation, production or dissemination of advertisements, such as layout, art direction, graphic design, mechanical preparation, production supervision, ad placement, referrals, acquisition of advertising space, consulting on advertising strategies, as well as online referrals, search engine marketing, lead generation optimisation, web campaign planning, acquisition of internet advertising space and monitoring or evaluating website traffic to assess advertising effectiveness. Advertising services are subject to tax based on the location where the services are received by the purchaser.
Washington imposes sales tax on pre-recorded online programs. Now, the state has expanded taxation to live presentations including lectures, seminars, workshops or courses where participants attend in person or via the internet or telecommunications equipment that allows audience members and the presenter or instructor to give, receive and discuss information with each other in real time. This may include programs for personal or professional enrichment such as art, music, business and marketing, cooking and CPR classes or lessons, continuing professional education for trades, offered in person or online.
The new law makes custom software and the customisation of prewritten software subject to sales tax. It also expands the definition of digital automated services subject to sales tax by removing the human effort exclusion, thereby bringing more digital services within the tax net.
Although Illinois does not tax SaaS under its sales tax laws, the City of Chicago considers SaaS to be a taxable lease of personal property subject to its Personal Property Lease Transaction Tax. Businesses can become subject to the lease tax by having either a physical or an economic nexus (earning over USD 100,000 in receipts during the last four consecutive quarters) with the city. The lease tax rate increased to 15% of the lease or rental price (up from 11%) on 1 January 2026 and will not be further increased before 1 January 2028 for all types of leases. Given these changes, it is important for compliance purposes that businesses track tax rates and sales in localities that impose tax on SaaS.
If nexus was established in prior years, and just discovered before registration, companies should review their previous activities and determine if they have exposure. This involves a review of taxability of their products and potential mitigation strategies, such as a review of exemptions, the collection of exemption certificates and direct pay permits, and determining whether use tax was paid by the purchaser. Companies should also consider mitigation through voluntary disclosure agreement programs, compromise agreements or tax amnesties that benefit companies with existing sales tax liabilities by offering a limited lookback period (generally three to four years) and abatement of penalties.
For inbound companies, obtaining a US Employer Identification Number (EIN) is often a prerequisite during the registration process, particularly before registering with state tax agencies. State sales tax registration forms typically require social security or federal EINs. As a result, officers, responsible parties or non-US businesses lacking this information should anticipate additional scrutiny during registration. It is important to be prepared to provide alternative documentation or information as requested by the relevant authorities.
Beyond determining the taxability of individual products and services, companies should carefully assess the implications of bundling offerings on the overall tax treatment. If the objective is to collect sales tax solely on taxable components, companies may wish to consider unbundling offerings—such as software, implementation, maintenance and training—into distinct, clearly itemised components. This approach not only enhances compliance accuracy but also bolsters audit defensibility by demonstrating a consistent and well-documented methodology.
Sales tax implications should be evaluated for intercompany transactions involving the transfer of tangible property or taxable services between related entities, even when no consideration is exchanged. In recent years, state auditors have increasingly scrutinised the components of management and technology fees. Because each state—and some local jurisdictions—has unique rules regarding taxability, it is essential to assess sales tax exposure wherever entities have nexus. By separately identifying and analysing each element of a bundled fee, companies can not only clarify whether the entire transaction is subject to tax, but also reduce risk during audits by demonstrating a thorough and well-documented approach to compliance.
When automating sales tax compliance with software tools, companies should ensure that the system is fully operational and has been tested for accuracy before registering for sales tax in multiple states. This is critical, as sales tax returns are typically due within a month of registration. If an automated solution is already in place, it is important to confirm that the new state will be included in future filings. Should the software fail to function as intended, companies must be prepared to file returns manually until the issue is resolved.
Angela Acosta
Ilya Lipin
BDO in United States
This fragmented environment creates unique challenges for companies, especially those operating in the technology sector and selling software, software as a service (SaaS), online education and access to digital information. For example, jurisdictions may classify SaaS as taxable tangible personal property, a lease or a data processing service. States may also provide for specific exemptions, such as exempting SaaS purchased for business use (Iowa) or imposing tax at a reduced rate (Maryland). Similarly, access to online courses, live presentations or subscription-based information services can fall into different tax categories depending on the state’s definitions and sourcing methodologies.
With the beginning of 2026, companies especially those offering software, digital products, access to information and similar services, should consider taking proactive steps to strengthen their US SUT compliance.
Reassess Nexus Profile
The first priority for inbound companies is to understand where they have sales tax nexus. Nexus refers to the level of connection, which can be physical and/or economic, with a state that requires a company to register, collect and remit sales tax.Physical nexus can be established by hiring US-based sales force or implementation consultants, attending trade shows or conferences, visiting customers, having an office or warehouse or holding title to inventory.
Economic nexus can be established without engaging in any physical activity in a state if the company’s sales activity exceeds a threshold (e.g., USD 100,000 in sales and/or 200 transactions), generally measured in the previous or current year. Measurement of volume of sales depends on state-specific methodologies that include counting all sales, gross receipts, retail sales or taxable receipts, including or excluding marketplace sales. In practice, we find that companies engaged in e-commerce, software or digital sales—even those with only a few hundred thousand dollars in sales across various US states—are likely to meet these thresholds, resulting in sales tax compliance obligations in multiple states. While some states may provide grace periods for registration (e.g., Alabama, Pennsylvania), many require registration and collection of tax the first calendar month after the month in which they meet the threshold (e.g., Maryland, Oklahoma).
It is important to remember that nexus can be established through physical activity before economic nexus thresholds are reached and continue after sales or transactions fall below the required thresholds.
Failure to identify nexus in a timely manner can result in several years of back-tax exposure, interest and penalties. Completing this review before year-end provides an opportunity to proactively correct course and address past issues—ideally before the state contacts the company.
Confirm Taxability
Determining taxability is challenging because each state defines digital goods, information services, data processing and SaaS differently. Taxability analysis is important for the following reasons:
- In measurement of volume of sales, taxability of a product may be impacted if sales are counted towards the economic nexus threshold.
- How the product is sold and used is also relevant. If sold through a marketplace platform, the marketplace facilitator may be required to collect and remit tax on behalf of the seller. If the product is taxable but purchased for resale, the seller may be exempt from collecting tax if a properly executed sales tax exemption certificate is obtained. Similarly, software and digital products may be used in other exempt activities, such as manufacturing. Therefore, if sales tax is not being charged in a jurisdiction that taxes the product or service, it is crucial for the company to confirm whether the customer is claiming an exemption and to collect appropriate documentation, such as an exemption certificate, to support the exempt sale.
Louisiana
Louisiana has imposed sales tax on SaaS since 1 January 2025, which typically involves charging customers for access to prewritten software owned by the seller or a third party, regardless of the fee structure. However, administrative guidance indicates that access to taxable SaaS may exist in less obvious scenarios. For example, a website that allows employers to post job openings online for a fee, while enabling job seekers to search, view and apply for these positions, is considered a taxable SaaS. In addition, Louisiana began to impose sales tax on digital products defined broadly to include digital audiovisual and audio works, books, codes, apps and games, periodicals, discussion forums and any other taxable tangible personal property transferred electronically—whether delivered, streamed, accessed or purchased by subscription, including maintenance, updates and support.
Louisiana began imposing sales tax on information services, including electronic data retrieval or research, and the collection, compilation, analysis or furnishing of information—such as general or specialised news, other current information or financial data—by print or electronic means. Information services include providing access to information through databases and subscriptions such as financial market and credit reports, pharmaceutical market research data, legislative tracking, weather alerts, sales lead generators and similar services.
Louisiana provides for an exemption from sales tax for SaaS, digital products and information services when they are purchased exclusively for commercial use, directly used in producing taxable goods for sale to customers, and goods and services produced are subject to SUT or insurance premium tax. For purposes of their commercial production exemption, “used directly” means a digital tool is essential and directly contributes to creating, developing or producing a final product or service for sale. Tools used for business management, planning, communication or analysis that do not directly transform inputs into salable goods or services do not qualify. Similarly, digital tools that improve efficiency or productivity—such as project management software, inventory systems, accounting programs, performance dashboards, CRM tools or communication platforms—are not used directly in production and are not exempt.
An exemption is also available for FDIC-insured financial institutions for storing, transmitting, processing or analysing customer and account information, facilitating transactions, account processes, investment processes, lending processes, or security and compliance. Further, an exemption applies if software is used by licensed healthcare facilities or providers for storing or transmitting healthcare information or for diagnosing or treating medical conditions.
Maryland
On 1 July 2025, Maryland introduced a tax at a reduced rate of 3% on sales of SaaS, data and information technology services for business-to-business transactions, as defined by reference to North American Industry Classification System sectors. Maryland now imposes sales tax on system software or application software publishing services (NAICS Code 5132), as well as sales of data or information technology services, including data processing, hosting and related services (NAICS Code 518), other information services (NAICS Code 519) and computer systems design and related services (NAICS Code 5415).
In determining taxability, a business’s primary activity code reported for federal and state income tax purposes does not determine whether its services are subject to Maryland SUT. Instead, businesses must compare the services they provide to the NAICS activity descriptions for data or information technology services and software publishing, as defined by Maryland law, to assess taxability.
Maryland’s administrative guidance provides examples of services that may be subject to tax, even if this is not immediately clear from the NAICS Code descriptions. For example, Maryland interprets NAICS Code 518 to include taxable activities such as cryptocurrency mining, media streaming support, infrastructure as a service and platforms as a service. For compliance purposes, companies should review the published examples in the guidance to determine if their services are considered taxable.
Taxable products purchased for individual consumption—meaning they are not purchased for exclusive use in business—are subject to a higher 6% tax. This means that SaaS sold for individual use is taxed at the 6% rate, and the same SaaS is taxed at the 3% rate when sold for use in an enterprise computer system.
The new law clarified that sales of taxable products noted above between affiliated companies are subject to tax, unless another exemption applies, such as sales for resale. In addition, effective 1 July 2025, the exemption for customised, configured or modified software or SaaS is repealed.
Washington
Effective 1 October 2025, Washington significantly broadened the scope of its retail sales tax to include several categories of services delivered digitally or electronically, such as information technology training, technical support, data processing, advertising services and similar offerings.
Advertising services subject to tax include all digital and non-digital activities related to the creation, preparation, production or dissemination of advertisements, such as layout, art direction, graphic design, mechanical preparation, production supervision, ad placement, referrals, acquisition of advertising space, consulting on advertising strategies, as well as online referrals, search engine marketing, lead generation optimisation, web campaign planning, acquisition of internet advertising space and monitoring or evaluating website traffic to assess advertising effectiveness. Advertising services are subject to tax based on the location where the services are received by the purchaser.
Washington imposes sales tax on pre-recorded online programs. Now, the state has expanded taxation to live presentations including lectures, seminars, workshops or courses where participants attend in person or via the internet or telecommunications equipment that allows audience members and the presenter or instructor to give, receive and discuss information with each other in real time. This may include programs for personal or professional enrichment such as art, music, business and marketing, cooking and CPR classes or lessons, continuing professional education for trades, offered in person or online.
The new law makes custom software and the customisation of prewritten software subject to sales tax. It also expands the definition of digital automated services subject to sales tax by removing the human effort exclusion, thereby bringing more digital services within the tax net.
Review Rates and Exemptions
Although Illinois does not tax SaaS under its sales tax laws, the City of Chicago considers SaaS to be a taxable lease of personal property subject to its Personal Property Lease Transaction Tax. Businesses can become subject to the lease tax by having either a physical or an economic nexus (earning over USD 100,000 in receipts during the last four consecutive quarters) with the city. The lease tax rate increased to 15% of the lease or rental price (up from 11%) on 1 January 2026 and will not be further increased before 1 January 2028 for all types of leases. Given these changes, it is important for compliance purposes that businesses track tax rates and sales in localities that impose tax on SaaS.
How to Strengthen your Sales Tax Compliance in 2026
- Companies should review their nexus profile at least on a semi-annual basis.
If nexus was established in prior years, and just discovered before registration, companies should review their previous activities and determine if they have exposure. This involves a review of taxability of their products and potential mitigation strategies, such as a review of exemptions, the collection of exemption certificates and direct pay permits, and determining whether use tax was paid by the purchaser. Companies should also consider mitigation through voluntary disclosure agreement programs, compromise agreements or tax amnesties that benefit companies with existing sales tax liabilities by offering a limited lookback period (generally three to four years) and abatement of penalties.
For inbound companies, obtaining a US Employer Identification Number (EIN) is often a prerequisite during the registration process, particularly before registering with state tax agencies. State sales tax registration forms typically require social security or federal EINs. As a result, officers, responsible parties or non-US businesses lacking this information should anticipate additional scrutiny during registration. It is important to be prepared to provide alternative documentation or information as requested by the relevant authorities.
- Companies should regularly review taxability of their products and services.
Beyond determining the taxability of individual products and services, companies should carefully assess the implications of bundling offerings on the overall tax treatment. If the objective is to collect sales tax solely on taxable components, companies may wish to consider unbundling offerings—such as software, implementation, maintenance and training—into distinct, clearly itemised components. This approach not only enhances compliance accuracy but also bolsters audit defensibility by demonstrating a consistent and well-documented methodology.
Sales tax implications should be evaluated for intercompany transactions involving the transfer of tangible property or taxable services between related entities, even when no consideration is exchanged. In recent years, state auditors have increasingly scrutinised the components of management and technology fees. Because each state—and some local jurisdictions—has unique rules regarding taxability, it is essential to assess sales tax exposure wherever entities have nexus. By separately identifying and analysing each element of a bundled fee, companies can not only clarify whether the entire transaction is subject to tax, but also reduce risk during audits by demonstrating a thorough and well-documented approach to compliance.
- Companies should consider outsourcing compliance or using automation solutions.
When automating sales tax compliance with software tools, companies should ensure that the system is fully operational and has been tested for accuracy before registering for sales tax in multiple states. This is critical, as sales tax returns are typically due within a month of registration. If an automated solution is already in place, it is important to confirm that the new state will be included in future filings. Should the software fail to function as intended, companies must be prepared to file returns manually until the issue is resolved.
Angela Acosta
Ilya Lipin
BDO in United States