Yes. Utah taxes software as a service (SaaS). Companies that have nexus in Utah need to collect and remit sales tax on sales to Utah-based customers. Utah’s current statewide base sales tax rate is 4.85%, and in some Utah cities and counties, an additional local sales tax is applied.
What does taxability mean for SaaS?
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). This can make properly collecting and remitting sales tax challenging for SaaS providers.
Understanding tax rates, physical and economic nexus thresholds, and what other digital products could be subject to sales tax is crucial for SaaS providers. Failure to comply with local tax regulations can result in audits and costly penalties.
SaaS taxation rules in Utah
According to Publication 64 from the Utah Tax Commission, SaaS is categorized as remotely accessed software, which includes hosted software, service provider software (ASP), and cloud computing applications. Sales of these items are taxable in Utah. The flat rate for state sales tax in Utah is 6.10%, but local sales tax is sometimes added on top of that.
Companies that have nexus in Utah are responsible for collecting and remitting tax on sales to Utah-based customers. There are two types of nexus: economic and physical.
A company has economic nexus in Utah if it either earns at least $100,000 in sales or conducts at least 200 transactions in a calendar year.
A company has physical nexus in Utah if it has a physical presence in the state. This includes any land or property leased or owned by the business, including storage. Third-party sellers and affiliates can also establish nexus in Utah.
Exemptions
SaaS is taxable in Utah as long as it is considered prewritten software. Prewritten software is classified as tangible property and is, therefore, taxable. Sales, leasing, and other charges surrounding prewritten software are all taxable. However, custom software is not taxable, as it is created for a sole consumer.
Any charges surrounding custom software, such as charges for leasing, maintenance, support, and upgrades, are also not taxable. Minor changes to software do not make it custom software. For example, if a company purchases SaaS and the SaaS provider adds things like names and account numbers to the app, that is not considered customization.
Other exemptions from sales tax, according to Utah’s policies, include certain types of buyers. Tax-exempt buyers for SaaS in Utah include:
- Any government entities in Utah, including local, state, and national.
- Specific enrolled members of Native American Tribes.
- Religious institutions.
- Charitable organizations.
- Local agencies on aging and any senior citizen establishment run by government entities or contracted local agencies on aging.
- Buyers primarily use SaaS for farming operations.
Example: How local sales tax rates may apply
Local sales tax is applied differently to SaaS transactions in Utah, depending on the city or county and whether the buyer uses software in multiple locations. In certain areas, district taxes could also apply.
For example, let’s say a self-employed designer in Provo, Utah, purchases a subscription to SaaS designed to help them with accounting. If the SaaS provider has nexus in Utah, it should be charging both Utah’s sales tax, which is 4.85%, and Provo’s city tax, which is 1.1%. Provo is one of the cities located within Utah County, so the transaction would incur an additional 1% county tax.
If that designer bought the SaaS in Utah but then conducted business in another state (and provided that information at the time of purchase), they would pay that location’s sales tax.
Navigating compliance for SaaS companies
Understanding tax compliance is crucial to avoid penalties incurred from negligence or non-payment. As of 2024, the interest rate for unpaid sales tax in Utah is 7%. Interest is calculated by the unpaid tax amount multiplied by the 7% interest rate multiplied by the number of days delinquent. Per Utah's tax policy, payments will always be applied in this order: penalties, interest, and then the unpaid.
Penalty fees, per Utah tax code §59-1-401, could be $20 or the following percentages:
- 2% of unpaid taxes, fees, or charges on the tax return if filed no more than 5 days past the due date.
- 5% of unpaid taxes, fees, or charges on the tax return if filed more than 5 days but under 15 days past the due date.
- 10% of unpaid taxes, fees, or charges on the tax return if filed more than 15 days past the due date.
Steps to stay compliant with Utah sales tax on SaaS
Once they have nexus in Utah, SaaS sellers must register with the Utah Tax Commission. The registration process provides SaaS companies and sellers with a tax account and sales tax license to pay taxes.
Collecting sales taxes simply involves applying the charges to transactions. Sellers should ensure that the taxes are described clearly to the customer.
Sales tax returns must be filed by the due date. People can file online, submit via mail, or have their returns auto-filed by a third party. Remember that filing after the tax deadline could cost SaaS sellers more money in penalties and interest.
Finally, sales tax remittance to the state is mandatory, regardless of whether a SaaS seller has properly collected sales tax from buyers. If the taxes have not been remitted, the seller will still be liable for sales tax owed to Utah and could face penalties.
Tools for calculating sales tax
Calculating sales tax correctly when there are so many local variances can be challenging and time-consuming. Using a dedicated tool to calculate sales tax can be very helpful for startups and growing technology companies.
Numeral is a fantastic tool for staying sales tax compliant. It’s an all-in-one SaaS tool that can integrate with other online platforms, and it handles the sales tax process from registration to remittance. Numeral can offer the following features:
- Automatically register and file in each state
- Chat support is available 24/7.
- Communication with the state and mailing paperwork on your behalf and notifications of state responses.
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Additional resources for staying compliant
Take advantage of the opportunity to utilize other tax resources, whether government resources or other outside sources. The Utah Tax Commission and Utah State Legislature websites have a vast amount of information to review, and tax codes are explained more deeply on the latter.
Tax tools like Numeral can be very helpful, and many tax companies or SaaS companies for tax services provide educational content on their platforms. Always be open to the idea of speaking with tax professionals.
The Utah Tax Commission can also be contacted by phone using helpline numbers 801-297-2200 or 800-662-4335. These numbers can be used for general tax inquiries, and resources and/or information can be provided.
The bottom line
Tax compliance can be intimidating for SaaS providers, but it doesn’t have to be. Handling SaaS sales tax in Utah can be made much more straightforward and much less time-consuming with a tool like Numeral. The most important thing is knowing that SaaS in Utah is taxable along with other digital goods, so sellers in the state can adequately begin their tax compliance journey.
