Yes. As of July 1, 2024, software as a service (SaaS) is taxable in Vermont. With the passage of Act 183 (H.887), a sales and use tax has been applied to prewritten computer software, regardless of how it is delivered or accessed. This includes SaaS.
Why is sales tax so complex for SaaS?
Unlike traditional software, SaaS does not usually involve a one-time purchase or downloading software onto a customer’s device. Instead, SaaS providers allow customers to access software through the cloud, or on the provider’s hardware. In return, customers typically pay a recurring subscription fee.
Many older state laws and tax regulations were written before this technology existed, so SaaS doesn’t fit neatly into some existing classifications. For this reason, SaaS taxability can vary significantly from state to state.
How does SaaS taxability differ across states?
How SaaS is taxed can often depend on the classification it receives from a specific state. These classifications typically categorize SaaS as either a service or tangible software. For example, in Pennsylvania, SaaS is considered tangible personal property, while South Carolina classifies SaaS as a taxable service.
Which classification SaaS receives can determine its tax rate, or whether it is exempt from tax entirely. Because these laws are always subject to change, SaaS providers need to stay informed about the tax regulations in every state where they operate.
SaaS taxation rules in Vermont
According to the Vermont Department of Taxes, prewritten software accessed remotely (that is, SaaS) was exempt from sales tax between 2015 and 2024. Vermont defines this software as:
- Programs for office work, including software that creates electronic documents, spreadsheet editors, and word processing applications
- Web browsers
- Video games
- Accounting software
In 2024, the passage of Act 183 (H.877) made SaaS purchases in Vermont subject to sales and use tax. It also allowed local jurisdictions within Vermont to levy an additional local option tax. This taxation applies to both business-to-business (B2B) and business-to-consumer (B2C) transactions. However, whether a provider is subject to these taxes also depends on their nexus in Vermont.
How does nexus work in Vermont?
As with many states, sellers have nexus in Vermont if they have a specific physical or economic presence in the state. Once nexus is established, a SaaS company is required to collect and remit sales tax in Vermont. While the exact requirements can vary in different regions, the nexus requirements in Vermont include:
- Physical nexus: A business has physical nexus in Vermont if it has a tangible presence within the state’s borders. This includes renting, leasing, or owning real estate that is used for the company, having employees or contractors working in the state, or storing property (for example, servers) in Vermont.
- Economic nexus: Economic nexus in Vermont is established when sales in the state reach at least $100,000 or at least 200 individual transactions during the current or previous calendar year.
Remote sellers in Vermont can also establish click-through nexus if they enter into agreements with Vermont residents to refer customers through referral links. If these agreements generate more than $10,000 in taxable sales to Vermont, the seller is required to collect and remit sales tax, even if they do not meet physical or economic nexus thresholds.
Are there sales tax exemptions for SaaS in Vermont?
Due to Act 183 (H.877), there may no longer be any sales tax exemptions for SaaS in Vermont. However, certain scenarios or customer types, such as sales to nonprofit organizations or government entities, might still qualify for exemptions if specific conditions are met. These exemptions are typically tied to the purchaser’s tax-exempt status.
Are digital goods taxable in Vermont?
Certain digital goods are taxable in Vermont, while others are not. According to the Vermont, taxable digital goods include:
- Digital audio works: Including downloadable music or podcasts.
- Digital audio-video works: Including digital movies or streaming video purchases.
- Digital books: Including e-books or electronic manuals
Some digital goods are exempt from sales in Vermont. These include digital photographs and custom software written exclusively for a customer’s business.
How local tax rates apply to SaaS in Vermont
In Vermont, the sales and use tax rate will depend on the county that a customer is located within. In addition to the statewide 6% tax rate, certain counties can also impose an additional sales tax creating an average combined rate of 6.36%. Some SaaS transactions could be taxed as high as 7%.
For example, if you had a customer in an area without local option tax and the subscription cost was $2,500, you would add a 6% tax of $150. If your customer lives in a county with local option tax, the tax would be 7%. So for a $2,500 transaction, the tax would increase to $175.
Vermont SaaS Tax Rates by County
According to the Vermont Department of Tax, counties with a 1% local option tax include:
How to stay compliant as a SaaS company in Vermont in 5 Steps
To stay compliant with Vermont’s sales tax regulations, SaaS companies can do the following:
- Register: Companies that meet physical, economic, or click-through nexus requirements must apply for a sales tax license and register for a Vermont business tax account. This can be done through the Vermont Department of Taxes’ official website, or through myVTax portal for quicker processing.
- Calculate: After a SaaS provider has registered, they’ll need to calculate the correct sales tax rate. This includes the 6% statewide sales tax and any applicable 1% local option tax. Accurate tax calculation is vital. To avoid compliance issues, providers may want to use tax automation software to simplify this process, especially those that operate in many jurisdictions.
- Collect: After calculating the right tax rate, businesses must collect the correct amount of taxes from each customer. For SaaS transactions, this is typically added to the subscription price and charged at the point of sale or upon renewal.
- File: Sales tax returns are due based on the filing frequency determined by the Vermont Department of Taxes. This frequency is typically based on sales volume and can be monthly, quarterly, or annually. Tax returns can be filed via the myVTax portal. Late or inaccurate filings can result in penalties, so it’s important to stay on top of deadlines and ensure all information is correct before submitting.
- Remit: Once your sales tax returns are filed, the collected taxes must be remitted to the Vermont Department of Taxes. This is typically done at the same time you file, following the same monthly, quarterly, or annual schedule assigned to your business by the state. Payment can be made electronically through the MyVTax portal.
These steps need to be combined with other important tasks, such as maintaining detailed records, monitoring changes in Vermont tax law, and conducting periodic internal audits to ensure accuracy. Although keeping up with all this may be difficult, the consequences of noncompliance can include incurring penalty charges, racking up high interest on tax debt, and an increased risk of audits.
To avoid these risks, SaaS providers can benefit from using tax compliance tools like Numeral. In addition, the Vermont Department of Taxes offers valuable resources to help businesses stay informed and compliant.
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SaaS compliance resources in Vermont
The Vermont state government provides various resources that could help SaaS providers stay compliant. These include:
- Vermont Department of Taxes Official Website
- Vermont Sales and Use Tax Page
- Vermont's free online portal for taxpayers, MyVTax portal
Companies can also contact the Vermont Department of Taxes directly about Sales and Use tax by calling (802) 828-2551 or email at tax.business@vermont.gov. Their hours are Monday, Tuesday, Thursday, and Friday, 7:45 a.m to 4:30 pm.
The bottom line
Due to the passage of Act 183 (H.877), software as a service (SaaS) providers in Vermont must collect and remit sales and use tax. Depending on what county a customer is located in, the applicable tax rate could be 6% (the statewide tax rate) or 7% (the statewide tax rate plus a local option tax). This tax obligation applies to any SaaS provider that establishes nexus in Vermont. That includes physical nexus (companies that have real estate, employees, or property in the state), economic nexus (companies that have sales into the state that reach at least $100,000 or 200 individual transactions), or click-through nexus (companies with affiliate programs that result in an excess of $10,000 in taxable sales to Vermont customers).
To stay compliant, SaaS providers must register for a sales tax license. After that, they’ll be required to collect and remit the correct amount of taxes while adhering to deadlines set by the Vermont Department of Taxes. Noncompliance can result in serious consequences, so it can be wise to use tax compliance tools like Numeral and resources provided by the Vermont state government.
