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.
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.
How nexus works in Connecticut
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:
- Physical nexus: Established when a business has real estate, representatives or employees, or inventory in the state. (read more about physical nexus)
- Economic nexus: Established when a business reaches $100,000 in sales or 200 or more transactions in the state in one year. (read more about economic nexus)
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.
Are there tax exemptions for SaaS in Connecticut?
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.
Are digital goods taxable?
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:
- Music
- Audiobooks
- Podcasts
- Computer gGames
- Digital gGame cContent
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.
How local tax rates apply to SaaS in Connecticut
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.
- For business use: If the SaaS subscription is for business use, the reduced 1% tax rate applies. For a $2,000 subscription, the amount of tax that has to be collected would be $20. This would bring the total cost charged to the customer to $2,020.
- For personal use: If the SaaS subscription is for personal use, it would be taxed at the standard rate of 6.35%. For a $2,000 subscription, that brings the total tax to $127, making the customer's overall cost $2,127.
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.
How to stay compliant as a SaaS provider 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:
- Register: The first step is to determine nexus and whether your company has a tax obligation in Connecticut. If you do, you’ll need to register for a sales and use tax permit. This can be done through the Department of Revenue Services' official website.
- Calculate: While there are no local sales taxes in Connecticut, SaaS providers must determine the correct tax rate for each customer based on how the service is used. SaaS for business use would be taxed at a rate of 1%, while SaaS for personal use would be taxed at 6.35%.
- Collect: Once the correct rate is calculated, providers must collect the right amount of taxes from the customer. This is completed at the time of sale and applies to all SaaS transactions, including subscriptions, renewals, and any additional products or services.
- File: Providers must file regular sales tax returns in order to stay compliant. The frequency of these filings (typically monthly, quarterly, or annually) is determined by the Department of Revenue Services and based on a business’s tax liability. Returns are filed through the online tax portal myconneCT.
- Remit: Providers will pay (or remit) taxes along with their returns to the Department of Revenue through myconneCT.
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.
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Resources in Connecticut
There are several resources provided by the Connecticut Department of Revenue Services that can help SaaS providers remain compliant in the state. These include:
- Connecticut Department of Revenue Services Official Website
- The Department of Revenue’s Sales and Use Tax Information Page
- Connecticut’s online tax portal, myconneCT, which can be used to register for a sales tax license, file returns, and remit taxes.
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.
Final thoughts
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.
