Yes. SaaS (software as a service) revenue and most digital product sales in Arizona are taxable, and this tax money should be remitted to the state's tax agency as part of Arizona's transaction privilege tax (TPT). Arizona charges 5.60% at the state level, and, when combined with local taxes, 8.38% on average.
If your company offers SaaS, you should know that Arizona sales tax will apply whenever you make a sale in the state, whether you’re physically located in Arizona or not.
Unfortunately, determining exactly how much you should charge and remit can be difficult, because the TPT rate varies based on the city and county of the sale.
But failing to understand the complexity of the state’s tax laws is not an excuse for non-payment. If you don’t pay the right amount on time, you will likely get hit with penalties, fees, and interest charges on the amount you owe.
The good news is that you can become tax-compliant in no time once you understand the law and start charging your customers the right rates. This article will explain how SaaS is taxed in Arizona and the best way to navigate compliance issues.
What does taxability mean for SaaS?
SaaS is not sold to consumers in the traditional sense. Rather, the consumer gains access to software and is able to use it over the internet, in exchange for a fee. The SaaS provider maintains control of the application, and the user never downloads it.
For instance, a Microsoft Office 365 subscription provides access to Microsoft Word, Excel, and other products in the Office suite, but that right is removed if the subscriber stops paying for the service.
Since SaaS isn’t a physical or tangible product, some states do not tax SaaS sales. State laws differ in their interpretation of digital services, tangible products, and software licensing.
That’s why offering SaaS across multiple states and counties can get complicated.
SaaS taxation rules in Arizona
In Arizona, prevailing legal interpretations consider digital services as tangible personal property. So the law considers digital services taxable. Arizona’s transaction privilege tax (TPT) also applies to out-of-state sellers who do business in the state, according to the Arizona Department of Revenue (ADOR) Private Letter Ruling (LR10-007).
However, states like Arizona can impose tax laws on your business only when nexus exists. Nexus is a connection between the business and the state. In Arizona, a business can establish nexus in one of the following ways:
- Maintaining a physical presence in the state. Examples include owning or renting an office, having server space, and storing inventory.
- Employing Arizona residents.
- Deriving $100,000 or more in gross proceeds from sales to customers in the state.
So a business may have a tax obligation even if it doesn’t have a physical presence in the state.
Are there any exemptions or exceptions?
In general, there is only one exception to SaaS being subject to TPT. If the software was created uniquely and specifically for one customer, it is exempt from TPT.
What types of digital goods are taxable?
Arizona law states that gross income derived from the sale of computer software is taxable regardless of how a business transfers the software to customers. Under that law, SaaS digital goods are taxable.
Digital goods that are stored electronically, like music files and software, are also taxable, as are digital services that are delivered electronically, like subscriptions.
What about IAAS?
IAAS stands for infrastructure as a service. This type of digital product is a cloud computing model that allows customers to pay a set fee for an allocation of essential computation, networking, and storage resources on demand. Examples of an IAAS are Apple iCloud and Google Drive.
In Arizona, IAAS would be considered a digital good subject to TPT.
Example: How local tax rates may apply
To highlight the complexity of TPT rates across Arizona, we’ll provide a fictional example of how local tax rates could apply to a SaaS business. These numbers are estimates and are meant only to demonstrate how tax rates differ across Arizona.
Say that a company is offering SaaS to customers for a fee, and they’ve recently acquired a few new clients in Arizona.
Customer A lives in Tempe, where the TPT is 1.8%. Customer B lives in Glendale, where the TPT is 2.9%.
Both customers want to purchase the service, which costs $45 a month. Customer A should be charged $0.81 in TPT, and Customer B would need to pay $1.31 in TPT.
Navigating compliance for SaaS companies
Despite the complexity of the tax laws surrounding SaaS in Arizona, it’s your legal obligation as a company doing business in the state to adhere to the laws set forth by ADOR.
Accurate TPT collection and remittance is important because non-compliance will lead to financial penalties. ADOR states that businesses who do not file and pay TPT electronically on time will face a 5% penalty on the whole tax debt for every month they are late.
And financial penalties might be only the beginning of your problems if you continue to ignore a compounding tax debt over time. In order to remain compliant, you’ll need to first investigate the various TPT laws in each county or city in Arizona where you do business. Then you’ll need to determine the accurate rate in each area and to ensure that you are collecting that amount on those transactions. Lastly, you must remit the correct amounts to the appropriate tax agency.
Needless to say, this process is usually complicated and time-consuming. On top of that, errors can be costly. The best way to ensure that you remain compliant is to outsource your tax payments to a third party, like Numeral. Companies like Numeral guarantee that you’re adhering strictly to all the proper tax codes in the various areas where you do business, and they’ll make sure your tax payments are remitted on time.
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Additional resources for remaining compliant
You can find much of the tax information you’ll need online. Utilize official resources, like the Arizona Department of Revenue official website to get answers and to stay informed about changes.
Information on TPT rates in any location in the state can be found in this ADOR tax rate table.
If you have specific questions or you’re not sure about how to effectively manage your tax situation, consulting with an expert is probably wise. A tax lawyer or a specialized automated tax service like Numeral can help.
Do you have more sales tax questions?
At Numeral, we take care of everything related to sales tax. You won’t have to spend more than a few minutes a month to ensure that your business remains compliant with all applicable sales tax laws.
Numeral provides 24/7 sales monitoring. We’ll register your company in all the states where you earn revenue, and we’ll collect taxes at the right rates no matter where you make sales. And when it’s time to remit your taxes, we’ll automate those payments for you.
Would you like to experience how Numeral works first-hand? Book a demo now to find out more about how Numeral can help with your business’s tax compliance.
The bottom line
If you offer SaaS or any other type of digital asset and sell to Arizona customers, then you need to know about the state’s sales tax laws. Remaining compliant is crucial, because not remitting the right amounts by the remittance deadlines will lead to penalties.
SaaS and other digital assets are taxable in Arizona, and it’s your responsibility as a business to know the tax laws and stay compliant.
Since digital commerce is constantly evolving, you should regularly check the resources outlined above to remain informed about changes to tax laws. You might also consider outsourcing your SaaS tax concerns to a business that focuses exclusively on that issue, like Numeral.
