This article will explain how Wisconsin’s taxation policies may affect providers of SaaS and some other digital goods.
Taxation rules in Wisconsin
In Wisconsin, SaaS is not subject to sales tax because it is classified as a nontaxable service, rather than as tangible personal property. This is according to official guidance from the Wisconsin Department of Revenue that covers the sales and use tax treatment of computer hardware, software, and services.
In this guidance, Wisconsin states that SaaS involves the remote access of software hosted on a vendor’s servers, which means that it is defined as a data processing service under state law. To remain nontaxable, SaaS must meet the following conditions:
- The customer does not take possession of the software, whether that be through download or physical transfer.
- The vendor maintains full control over both the software and its server.
- The service does not include any taxable components, such as tangible goods or telecommunication services.
Wisconsin’s sales tax rules generally apply whether a SaaS transaction is business-to-consumer (B2C) or business-to-business (B2B). The state is more concerned with the nature of the product, where it is used, and where it is delivered. For SaaS, tax exemptions are maintained when the provider controls the software and servers. However, sales of prewritten software and other digital goods can be subject to tax.
Are digital goods taxable?
Wisconsin does not currently tax SaaS, and it has not announced plans to do so in the future; however, it does tax certain digital goods at a rate of 5%. Digital goods that are subject to tax include:
- Prewritten or “canned” software, regardless of whether it is delivered via download, physical media, or remote access, as long as possession is transferred. However, on January 1st, 2025, Wisconsin did clarify that there are no charges for remote software when that software is used to process the client’s own data.
- Digital media, including music, movies, e-books, and games.
- Software maintenance contracts for prewritten software if they include updates delivered electronically or physically.
SaaS that is bundled with goods like these or other taxable components may also be subject to tax. If downloadable software is offered along with a SaaS product, the entire transaction could become taxable unless each portion is explicitly separate. Taxability can also be determined by other factors, such as nexus.
How does nexus work in Wisconsin?
The term “nexus” typically refers to a connection to a state that creates a tax obligation. In Wisconsin, there are two types of nexus to consider: physical and economic.
- Physical nexus: Businesses establish physical nexus when they have a physical presence — such as real estate, representatives, or inventory — in Wisconsin.
- Economic nexus: Businesses that lack a physical presence but still serve customers in Wisconsin (also known as “remote sellers”) can establish economic nexus. This occurs when gross sales surpass $100,000 in the current or previous calendar year. As of 2021, Wisconsin removed its 200 transaction threshold from its economic nexus standard.
It’s important to note that establishing nexus does not necessarily mean a provider will need to pay sales and use tax. Nexus is just one of several factors that need to be considered by companies who do business in Wisconsin.
While Wisconsin doesn’t tax SaaS, compliance is still important
Although SaaS providers with customers in Wisconsin may not be required to collect sales tax, many other states do consider SaaS taxable. Companies that do business in multiple states must understand taxation laws and procedures in all the regions where they do business. For example, states near Wisconsin that classify SaaS as taxable include:
- Iowa: Iowa imposes sales tax on SaaS, which it defines as vendor-hosted computer software accessed through the internet or cloud. In addition to taxing SaaS as a digital product, Iowa also taxes the installation, maintenance, and upgrade of any SaaS products.
- Illinois: While the state of Illinois does not tax SaaS, the City of Chicago does. Using its home rule authority, Chicago imposes the Personal Property Lease Transaction Tax (PPLTT), which applies to SaaS.
Staying up-to-date and complying with the tax laws in all the jurisdictions where you do business is important. To stay compliant, providers will also need to follow specific procedures and follow the guidance provided by each state’s taxation authority.
How to stay compliant as a SaaS company
While compliance procedures not only vary by state but also may vary by city, county, borough, or parish, there are several steps that most jurisdictions require.
- Register with the state: If you determine that you have a tax obligation within a specific jurisdiction (typically by establishing nexus), you’ll need to register with that state’s taxation authority. In Wisconsin, this authority is the Wisconsin Department of Revenue.
- Calculate the correct tax rate: If you establish nexus in a state that taxes SaaS, you’ll need to calculate the correct rate. This can involve researching whether any legislative changes have increased or decreased the statewide rate, determining whether any local sales tax applies, and seeing whether you qualify for any exemptions. While SaaS isn’t taxed in Wisconsin, companies that offer multiple types of products may still be subject to sales and use tax. Information on this tax is available through the Wisconsin Department of Revenue.
- Collect tax on each transaction: After calculating the correct combined state and local tax rate, you’ll need to collect that amount on each transaction. In states that tax SaaS, these transactions will typically include subscriptions, renewals, and any other products or services a company provides.
- File returns and remit taxes: Most states require registered businesses to file regular sales tax returns. The frequency of these returns is typically determined by the state’s taxation authority and tends to happen on a quarterly, monthly, or annual basis. Along with these returns, providers will need to remit the taxes they’ve collected. In Wisconsin, returns and remittances can be delivered through the state’s My Tax Account portal.
If these and the many other components of compliance are not taken care of, SaaS providers may experience significant consequences. Noncompliance can lead to penalties, interest, and an increased risk of audits. In some cases, providers may lose their business license and ability to operate in a state. To avoid these consequences, it can be helpful to use a tax compliance platform like Numeral, alongside resources provided by each state’s taxation authority.
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Resources
Wisconsin provides an array of resources for companies that can guide them through their compliance standards and procedures, including:
- The Wisconsin Department of Revenue Official Website
- Wisconsin’s Tax Assistance Programs
- “My Tax Account” Taxpayer Portal
The Wisconsin Department of Revenue’s business service line can be reached at 608-266-2776. Their call center is open Monday through Friday from 7:45 a.m. to 4:30 p.m. Central Time.
The bottom line
While SaaS is not currently subject to sales and use tax in Wisconsin, certain digital goods are. These digital goods include prewritten software (regardless of delivery method), digital media (including movies, music, e-books, and games), and software maintenance contracts involving electronic or physical updates.
Even if their products or services are not taxed in Wisconsin, SaaS providers may need to collect and remit sales tax in other states. Understanding whether you have a tax obligation can start by determining nexus, which is established when a business meets certain physical or economic requirements within a state.
While the exact process can vary from state to state, compliance typically involves registering with the state’s taxation authority, calculating the correct tax rate, collecting taxes on each transaction, and delivering regular tax returns and remittances to the state. These and many other aspects of compliance may be simplified by using a platform like Numeral, as well as resources provided by each state’s taxation authority.
