Yes. SaaS (software as a service) sales are nearly always taxable in Washington. The current state-level tax rate is 6.5%. Many local jurisdictions (such as cities and counties) in Washington impose their own sales tax as well. Staying informed about both state and local tax rates is key to ensuring compliance.
Companies that have nexus in Washington must collect and remit the correct tax amounts (more on nexus later in this article) in order to avoid costly penalties and audits.
How is SaaS taxed?
Unlike traditional applications, which are purchased and then downloaded onto a user’s device, SaaS is accessed via the cloud, or on the provider’s servers. Customers “rent,” or subscribe to, the software on a monthly or yearly (or other) basis.
Because SaaS is relatively new, state tax authorities classify it in different ways and apply different taxation rules. This makes the laws surrounding SaaS taxability rather complex. For example, SaaS isn't taxable in some states where services aren't taxed. In some states, including Washington, SaaS is viewed as a type of tangible software. In Washington, this makes SaaS a taxable product.
Taxation rules in Washington state
If you offer SaaS products to customers in Washington and have nexus in the state, you’ll need to collect tax whenever a sale occurs (there are a few exceptions). Nexus is a connection between the state and a business.
The two types of nexus are physical and economic. Your business has physical nexus in Washington if it has a physical presence in the state, such as a warehouse, a distribution center, or an office. If you have employees who work in Washington, you might also have physical nexus.
Online-only businesses that offer SaaS rarely have physical nexus in many jurisdictions. These businesses are more likely to have economic nexus. For many states, economic nexus is established when you reach a certain sales threshold there. In Washington, that threshold is $100,000 in annual sales revenue. Businesses that earn at least $100,000 in Washington must collect taxes on SaaS sales and remit the collected amounts.
Some sales are exempt from sales tax in Washington. For example, nonprofits and educational institutions are usually exempt from paying sales tax.
While many states provide a sales tax exemption to government agencies and institutions, this isn't the case in Washington. When a customer claims that they don't need to pay taxes, you must verify the information.
The types of digital goods that are taxable include downloaded items, streamed goods, and digital automated services. You must collect taxes on any digital products that contain the following components:
- Data
- Information
- Sounds
- Facts
- Images
Keep in mind, however, that these products and services may not be classified as digital goods:
- Remote access software
- Digital automated services
- Computer software
- Internet access
Businesses in Washington may need to pay a retail sales tax as well as a business and occupation (B&O) tax. The B&O tax is a type of gross receipts tax that's levied on the total value of services, products, and activities in Washington. These rates vary based on the type of activity and the classification of your company.
Example: How local tax rates may apply
To understand how a SaaS sale is taxed, let's say that you own and manage a company that offers project management software to other businesses. If these services are available in the form of a monthly or annual subscription, you'll need to collect taxes on them. The base sales tax rate in Washington is 6.5%. If a customer buys an annual subscription that costs $3,000, the sales tax will push the final price up to $3,195.
Keep in mind, however, that local tax rates can also apply in Washington. These rates are additive, which means that they are placed on top of the base 6.5% tax rate. Additional sales taxes can be imposed by the following entities:
- Districts
- Transit districts
- Public facilities
- Towns
- Cities
- Counties
When considering local taxes, the average combined rate in Washington is 9.38%. If you use the same amount mentioned previously, the final price will be $3,282. It's important to note that local tax rates can vary depending on the specific jurisdiction within the state.
Navigating compliance
Once you calculate the tax rates in your area, you need to make sure that your company is compliant with the state's tax laws. By correctly calculating, collecting, and remitting taxes in Washington, you'll be able to avoid penalties and fines.
Businesses that don't file their tax returns on time in Washington will need to pay a 19% penalty at the end of the next month. When the second month ends, the penalty will increase to 29% of the amount that's owed.
If you have nexus in the state, you'll need to register with the Washington Department of Revenue (WDOR) to obtain a tax account. You must collect sales tax when the sale occurs. Tax collection amounts must be regularly reported to the WDOR. However, the frequency depends on your sales revenue amount. You can file monthly, quarterly, or annually.
If you currently owe sales tax in Washington but haven't collected it, you may be able to take advantage of the WDOR’s Voluntary Disclosure Program, which provides several benefits to businesses that owe taxes. If you qualify, penalties can be partially or fully waived. The look-back period is four years, as well as the current tax year.
You can qualify only if you haven't registered your business with the WDOR. It's also crucial that the department hasn't contacted you in the past. If you'd like to de-register your business and stop providing SaaS software to Washington consumers, you'll need to close your WDOR account, which can be done online.
While compliance with Washington's complex tax rules can be difficult, you can greatly simplify this process with Numeral, a tool designed specifically for SaaS companies. Numeral allows you to put tax collection and compliance on autopilot. Once you start using this service, you shouldn't have to spend more than five minutes on sales tax compliance in a month. The software will monitor every sale you make to ensure that taxes are handled properly.
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Additional resources for staying compliant
If you want to learn about the latest tax rulings and rates in Washington, the WDOR has a page on its website that's dedicated specifically to tax updates. You can even sign up to receive notifications on changes that might apply to your company.
You can ask questions about your taxes by speaking directly with a representative at the Department of Revenue. Live chat is available on weekdays. The WDOR also provides free workshops and webinars for businesses that need further assistance.
The bottom line
SaaS transactions are almost always taxed in Washington if companies have physical or economic nexus (in annual sales). While the state tax rate is 6.5%, you must identify the local rate to ensure that you collect enough taxes and remain compliant.
Consult the Washington Department of Revenue's website and other state resources to learn more about SaaS sales tax. If you want to easily ensure tax compliance, consider using tax management software like Numeral.
