Yes, many types of SaaS products are taxable in Ohio. Ohio taxes retail sales at a rate of 5.75%. And combined rates (including additional city or county taxes), on average, are 7.24%.
“Sale” refers to tangible personal property; prewritten software is specifically included in this definition. The tax is applicable if the seller has nexus (an economic or physical presence) in the state.
This article examines sales tax in Ohio and how it applies to software as a service (SaaS). Understanding these tax laws and regulations is crucial for SaaS providers who want to remain compliant and make informed business decisions.
How is SaaS taxed in Ohio?
In terms of taxation, states differ in how they classify SaaS, which can be seen as either a product or a service (or a hybrid of the two).
So SaaS providers must be diligent and careful in their research of applicable tax rules and regulations and abide by all tax rules applicable to relevant jurisdictions.
Since 2014, Ohio has defined SaaS as tangible personal property. The state charges a 5.75% sales tax if the customer uses the service for business (not for personal use).
A SaaS provider is responsible for collecting and remitting sales tax if they have nexus in the state. There are two types of nexus: physical and economic.
A business has physical nexus in Ohio if it:
- Maintains a place of business in Ohio (such as an office, a warehouse, or a store).
- Has employees or sales representatives working in Ohio.
- Stores inventory in Ohio, even inventory in a third-party warehouse.
- Has a close business relationship with an affiliated company with a physical presence in Ohio.
A business has economic nexus in the state if its gross revenue exceeds $100,000 in the state or if it has at least 200 Ohio transactions in the current or previous calendar year.
In addition to Ohio’s state sales tax, counties, and other local jurisdictions have the authority to levy their own sales tax. In the case of the Cleveland metropolitan area (Cuyahoga County), that can add 2.25%, bringing the total sales tax rate to 8%.
Sales tax exemptions and exceptions
There are some notable exceptions to the rules stated above:
- Sales of SaaS to the state of Ohio or any of its political subdivisions.
- Sales of SaaS to churches or other qualified nonprofit organizations.
- Sales of SaaS used in manufacturing may be exempt.
- Sales of SaaS are used solely for research and development.
- Sales of SaaS on days designated as sales tax holidays. Purchases of items costing more than $500 do not qualify.
For a complete list of exceptions, refer to the Ohio Department of Taxation FAQ section “Sales and Use - Applying the Tax.”
The taxability of digital products in Ohio
Other digital products sold in Ohio, such as music, videos, streaming services, e-books, and online games, are generally taxable. For example, if a college student purchases an electronic textbook for a class, that purchase would be taxable.
How it works: Examples of applying sales tax in Ohio
Sales tax can get complex.
Let’s say that Company XYZ, maintains a physical administrative office in Cleveland, Ohio (and therefore has nexus in Ohio). It offers one SaaS product for a $100 monthly subscription. XYZ has 5,000 business subscribers in Cuyahoga County, Ohio.
Of these 5,000 businesses, 140 are churches, and 27 have documented using the service solely for research and development (R&D) purposes. The business also offers a product for individuals and has 1,200 individual subscribers (these individuals are not considered businesses and are not taxed). Ohio has designated the third week of August as a sales tax holiday.
So the company must potentially collect sales tax from 4,833 Cuyahoga County customers (the ones who are not exempt: churches and research facilities). However, its sales reports also show that 52 qualifying businesses purchased the service and paid $100 to XYZ during the sales tax holiday period, and should not be taxed. So the tax for August would apply to 4,781 customers. Here is the calculation:
4,781 x $100 = $478,100 x 8% = $38,248. The total is divided:
- State of Ohio $27,490.75 (5.75%).
- Cuyahoga County $10,757.25 (2.25%).
Compliance issues to consider when collecting sales tax in Ohio
If you have determined that your business has a nexus in Ohio and is responsible for collecting and remitting sales tax there, the first step is registering with the Ohio Department of Taxation. This can be done via a paper application, but the more efficient way is to use the electronic “Ohio Business Gateway.”
Per the Ohio Department of Taxation, “All sales and use taxpayers, regardless of sales or use tax volume, are required to file electronically.”
Returns and payments are due on the 23rd day of the month following the end of the taxable period. That applies to monthly, quarterly, and semi-annual payors.
Section 5751.06 of the Ohio Revised Code imposes a penalty of up to 15% for late filing or delinquent payments. An interest charge of 8% is also added.
Like most other taxing authorities, Ohio can audit businesses to ensure compliance with state sales tax rules and requirements. An audit can be initiated randomly, and all businesses are liable to be audited. So it’s necessary to capture and retain all pertinent data on customers and clients so you can produce records and reports upon request. In other words, a professional accounting and record retention system is needed.
Filing and paying sales taxes on time is crucial. However, Ohio does offer a first-time penalty abatement if no penalties have been assessed in the previous three years. Also, “reasonable cause” may allow for penalties to be lowered or removed in certain circumstances.
If navigating the complexities of state sales tax (in Ohio and across the country) is taking too much time, consider employing the services of a trusted tax service such as Numeral.
Numeral is an all-inclusive, white-glove sales tax service that offers customers complete peace of mind in managing sales tax obligations, and it requires only five minutes each month of the customer’s time. Based on the tasks and chores outlined above — a small fraction of the time necessary to handle everything in-house.
[blog-post-inline-cta]
Some helpful resources?
Ohio provides many resources to help instruct and educate on sales tax issues. Here are a few to help you search for additional information and greater detail on the topics covered in this article:
- Chapter 5739 of the Ohio Revised Code - Sales Tax
- Ohio Department of Taxation - Resources for Businesses
- Ohio Department of Taxation - Sales & Use Tax
- Ohio Department of Taxation - Due Dates
- Ohio Department of Taxation - FAQ - Sales and Use - General Information
- Ohio Small Business Tax Guide
Business Information line: 888-405-4039.
The Ohio Department of Taxation website also includes up-to-date information on webinars, workshops, and other resources.
The bottom line
The state of Ohio considers SaaS to be tangible personal property and applies a 5.75% sales tax to sales. In addition, counties and other local authorities also tax SaaS sales.
Sellers with nexus (physical or economic) in Ohio must collect and remit tax on sales to customers in Ohio.
Sales of SaaS are taxable if the SaaS will be used for business; sales for personal use are not taxed. Some exceptions apply; consult a tax professional if you have questions. Penalties and interest are added to tax amounts for late filing and late payments. So do your homework carefully to avoid costly and time-consuming penalties. Consider a sales tax processing service such as Numeral to handle your administrative burden and make sure you stay compliant with tax regulations across the U.S.
