Yes. In South Carolina, software as a service (SaaS) is generally subject to sales and use tax.
According to the South Carolina Department of Revenue (SCDOR), SaaS accessed through a provider’s website — known as an application service provider (ASP) model — can be taxed at a rate of 6% to 9%, depending on the county customers are located in. And taxability can vary based on a variety of other factors as well. This article will explain the general rules governing SaaS taxability in South Carolina, to help providers stay compliant.
What Does Taxability Mean for SaaS?
With physical goods, applying a tax is straightforward, and state tax laws are usually well defined and widely understood. Defining taxation for SaaS can be challenging, due largely to the way it is sold, delivered, and accessed. Unlike traditional software, which is typically sold to consumers who then download it onto their computer or other device, SaaS remains on the vendor’s hardware. Users don’t actually own the software; instead, they pay a subscription fee to access it.
Why SaaS taxability differs from state to state
In part, because SaaS is relatively new, sales tax requirements for it can vary from state to state. Whether SaaS is taxable depends primarily on how a specific state classifies it, whether that be as a service, tangible software, or something else. Some states, such as Connecticut and Massachusetts, treat SaaS as a taxable service. Others, like New York and Washington, categorize it as tangible personal property.
This classification determines whether SaaS will be taxed according to that state’s service or sales tax. In some cases, SaaS may also be seen as a non-taxable digital product, exempting it from tax entirely. Because tax laws can vary significantly throughout the United States, SaaS providers need to stay current on the regulations in each state where they operate.
SaaS taxation rules in South Carolina
The primary ruling defining SaaS taxability in South Carolina is Revenue Ruling #03-5. This ruling states that software transferred to a customer directly — whether that be via a physical medium, like a disk, or a digital download — is subject to sales and use tax. Although this might seem to exclude SaaS hosted and accessed by customers on a provider’s website, SCDOR clarified that SaaS delivered through an ASP model is also subject to sales and use tax. This applies to both business-to-consumer (B2C) business-to-business (B2B) transactions. For SaaS transactions conducted through an ASP model, the statewide 6% sales and use tax rate applies, with the potential for an additional local tax of up to 3%, depending on the customer’s county.
SaaS taxability in South Carolina was further clarified in 2020 with Revenue Ruling #20-1, which explicitly states that online software subscription services (including cloud-based services) were subject to sales and use tax under Code Sections 12-36-910(B)(3) and 12-36-1310(B)(3). Together, these rulings reinforce the fact that both SaaS and other cloud-based solutions are subject to South Carolina’s tax requirements. However, a provider's precise obligations can depend on certain factors, such as their nexus within the state.
How to determine nexus in South Carolina
In South Carolina, as in many states, the word “nexus” refers to a specific presence or activity that creates a tax obligation for a company within the state. Where this nexus is established, and which category it falls into, often determines the nature of this obligation. In South Carolina, these categories include physical nexus and economic nexus.
Physical Nexus: If a business or company has real estate, personnel, property, or inventory in South Carolina, this means they have nexus in the state. Examples include owning or renting an office, having employees or contractors working in the state (including those working from home), or housing server space within the state’s borders.
Economic Nexus: As of November 1, 2018, businesses with an economic presence in South Carolina, known as “remote sellers,” must pay sales and use tax if they meet certain standards, even if they have no physical presence in the state. In order for a remote seller to have economic nexus, they must exceed $100,000 in gross revenue from the sale of:
- Products delivered electronically
- Services
- Tangible personal property
These sales must be delivered to customers in South Carolina during the previous or current calendar year. Once this threshold is met, the business must register with SCDOR and pay the applicable tax.
Are there sales tax exemptions for SaaS in South Carolina?
The SCDOR does list several sales and use tax exemptions that may apply to certain SaaS transactions. For example, sales to nonprofit organizations and government agencies may qualify for exemptions, although these are typically associated with tangible personal property. There are also cases where SaaS may be exempt when it is classified as a service. To confirm whether specific SaaS offerings are exempt, it can be helpful to contact a tax professional or SCDOR directly.
What Digital Goods are Taxable in South Carolina?
According to Revenue Ruling #03-5, digital goods in South Carolina are generally not subject to tax if delivered electronically. The ruling specifies that electronically sold and delivered computer software does not meet the definition of tangible personal property, making it exempt from sales and use tax. However, if any part of the software is delivered tangibly, then it can be taxed. Additionally, the updated ruling in 2020 establishes that communications are defined as tangible personal property under Code Section 12-36-60. This means that services that allow for the transmission of voice or messages may be taxable.
How local tax rates may apply to SaaS in South Carolina
In South Carolina, sales and use tax is applied based on the point of delivery, or where the customer is located. As of 2024, the statewide sales and use tax is 6%, but counties can impose additional taxes, including:
- A local option sales tax (1%)
- A capital projects tax (up to 1%)
- An education capital improvement tax (up to 1%)
These additional taxes could cause SaaS sales to be taxed as high as 9%. This rate can impact SaaS providers differently depending on whether they have economic or physical nexus in the state.
Examples
Economic nexus
If your business is based outside of South Carolina but your sales to customers in the state exceed $100,000, you have economic nexus. This requires collecting the 6% state sales tax plus any applicable local tax based on the customer’s county.
Example: Say you have a customer in Charleston County, where the combined state and local tax is 9%. If their subscription cost is $3,000, the tax would be $270, resulting in a total charge of $3,270. You would then remit (pay) the $270 to SCDOR.
Physical nexus
If your business is physically based in South Carolina with an office or employees, you do not need to meet the $100,000 sales threshold. In this case, you would collect state and local taxes on all sales to customers in the state, regardless of sales volume.
Example: Say you have a customer in Charleston County and another in Greenville County who both pay a $3,000 subscription fee. The Charleston County customer would be taxed at 9%, or $270, while the Greenville County customer (who lives in an area with no additional local tax) would be taxed at the 6% state rate, or $180.
South Carolina SaaS tax rates by county
As a SaaS provider, it’s important to stay up-to-date on the current tax rate for your area. As of May 1, 2023, SCDOR lists the local tax designations for each county in South Carolina as the following:
These rates are subject to change, so it may be helpful to contact the Department of Revenue to ensure you are using the correct rates. Staying informed about local tax rates is one of several steps you will need to take to maintain compliance.
How to stay compliant as a SaaS company in South Carolina in 5 steps
To ensure compliance with South Carolina’s sales tax regulations, SaaS providers can follow these key steps:
- Register: Companies operating in South Carolina must obtain a sales tax license from SCDOR. You can complete the application for this license through their official website.
- Correctly Calculate: Once registered, SaaS providers will need to calculate the sales tax rate for each transaction. This rate will depend on several factors, including the customer’s location, the current state tax rate, and any applicable local taxes.
- Collect: After determining the correct tax rate, providers will need to collect taxes from each customer at the time of sale. For SaaS transactions, this can involve adding the calculated tax each time a subscription is renewed.
- File: Sales tax returns must be sent to SCDOR, detailing taxable sales, collected taxes, and any exemptions that a company qualifies for. This may occur monthly, quarterly, or annually, depending on your sales volume and SCDOR requirements.
- Remit: Remitting, or paying, the collected state and local taxes must be completed by the due date set by SCDOR. This due date can vary depending on your filing schedule.
Failure to follow these steps may result in noncompliance, which can have serious consequences for SaaS companies. These may include significant penalties, interest charges, and a higher risk of audits. To help prevent these, tax compliance tools like Numeral can be essential. It may also be helpful to utilize the tax compliance resources provided by the SCDOR.
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Additional resources
South Carolina’s government provides a number of resources that can help SaaS companies stay compliant. These include:
- South Carolina Department of Revenue (SCDOR) Website
- SCDOR Sales and Use Tax Information
- SCDOR’s free online portal for South Carolina taxpayers, MyDORWAY
In addition, educational resources available through the South Carolina Business One Stop (SCBOS) or the South Carolina Association of CPAs (SCACPA) could be beneficial. Taxpayers can also contact SCDOR directly about Sales and Use tax by visiting one of their offices, sending an email to SalesTax@dor.sc.gov, or dialing 1-844-898-8592.
The bottom line
Staying compliant with South Carolina’s tax regulations is essential for SaaS providers operating in the state. This can involve completing several steps, including:
- Determining whether your SaaS product qualifies as taxable.
- Registering with the South Carolina Department of Revenue.
- Calculating and collecting the correct tax based on customer location.
- Filing accurate sales tax returns.
- Remitting taxes by the specified deadlines.
To simplify this process, it may be helpful to use resources provided by South Carolina or reliable tax compliance platforms like Numeral. By taking advantage of these resources and staying compliant, SaaS companies can avoid costly penalties, continue operating legally, and serve their customers without interruption.
