Which states have no sales tax?

What are the states with no sales tax?

The NOMAD states

There are five U.S. states which currently apply no sales taxes at the state level. These five are sometimes known as the NOMAD states because of the first letters of their names: New Hampshire, Oregon, Montana, Alaska and Delaware.

Some sales taxes are local

Just because no sales taxes are levied at the state level doesn't mean there are no sales taxes in these states at all. For example, both Alaska and Montana have regional jurisdictions in which local sales taxes are applied, such as some tourist areas and cities.

A sales tax by another name

Some states, such as Delaware, compensate for the lack of sales tax income by applying a gross receipts tax on suppliers. This generates similar state revenue to a sales tax except that the seller pays the tax directly instead of the buyers.

A zero-rated sales tax at the state level is therefore no guarantee that your company won't have to pay tax on the digital products or services it sells in that state.

Other states with minimal sales tax rates for SaaS and digital products

Many states that do levy sales taxes have exemptions in place for SaaS. For example, the following states have general sales taxes but do not tax SaaS: Florida, California, Kansas, Michigan, Virginia and Wyoming. In fact approximately half of all U.S. states exempt SaaS from their sales taxes.

Of the remaining half, some tax SaaS only at the local level (such as Illinois and Colorado) while others apply state sales taxes depending on whether a transaction is business-to-business or business-to-consumer (such as Ohio and Iowa).

By contrast, New York, Pennsylvania and Texas are three of the larger states that apply full sales tax to SaaS transactions.

This situation is fluid. It seems likely that more states will tax SaaS and digital product sales in the future as the economic situation evolves:

• Sales taxes were originally levied on tangible goods such as furniture, vehicles, electronics, books and magazines. SaaS and digital products have been ignored until recently because they aren't tangible – there’s nothing that can be physically touched. By contrast, software sold on physical media (such as video-game discs) has been generally taxable at the point of sale.
• The SaaS market has grown dramatically in the past decade, which means that revenues from SaaS and digital product sales have also vastly increased. Inevitably, this has caught the attention of state tax legislators.
• Complications exist because SaaS delivery is more of a rental model than a sales model. SaaS customers do not usually purchase a standalone item of software. They pay a recurring fee for a license to use a continually-evolving and regularly-updated software service. This distinction hasn't prevented tax authorities in various states from labeling SaaS as "digital goods" and taxing it accordingly.

Understanding your SaaS/digital product sales tax obligations in other states

State tax legislators have become increasingly vigilant about sales from companies based in other states, to the extent that many now routinely tax sales even if the seller has no physical presence in that state.

The relevant tax term here is "nexus" which means "a connected group." If your business is considered to have nexus within a particular state, that state can potentially levy taxes on all your SaaS and digital product sales within its borders.

Nexus rulings used to depend on factors such as a company having employees or distribution warehouses within the state. However, an important 2018 Supreme Court ruling (South Dakota v. Wayfair, Inc.) shifted this range of criteria towards economic factors instead of physical ones. States are steadily updating their tax legislation in accordance with this ruling.

This means that your company may have nexus in a particular state based solely on its sales revenue or transactions within that state. The existence of affiliate resources within a state can also shift the balance towards nexus.

Clearly this makes SaaS sales tax administration even more complex, since companies must now take into account the sales tax regimes of every state into which they sell, directly or indirectly, regardless of whether they have a physical presence there.

How does sales tax compliance work at Paddle?

Sales tax compliance is complicated both practically and legally. Taking into account factors such as local and state-level taxes, there are approximately 13,000 different tax jurisdictions – just within the U.S.

The tax landscape is constantly changing as state and local legislators update their laws. For SaaS and app business companies selling into U.S. states, keeping compliant with tax law using only in-house resources can be expensive, frustrating and time-consuming. It’s wise to offload this work to a third party so that you can focus on what your business does best.

• Paddle acts as a Merchant of Record for companies selling digital products and services. Paddle takes legal responsibility for ensuring that the correct sales taxes are charged in every state and local jurisdiction in which you make a sale, not just in the U.S.
• For every transaction, Paddle identifies the location of the customer and accurately calculates all necessary sales taxes. This includes sales taxes, VAT (Value Added Tax), GST (Goods and Services Tax) and other local equivalents around the world.
• By taking responsibility for your sales taxation obligations, Paddle ensures that your business is compliant with all local, state and national tax laws right from the start, no matter where your customers are located.

In short, Paddle calculates, files and remits taxes on your behalf, taking all sales tax obligations away from you.

You focus on your product, we'll make you compliant everywhere

Sales taxes are a fact of business life but dealing with them is rarely one of a SaaS company’s core competencies. It makes sense to outsource sales tax management to a specialist so you can focus on what your business does best.

Paddle’s platform is the global solution for SaaS and app business owners worried about staying tax-compliant. Paddle handles all sales tax obligations – calculating, filing and remitting – so you don’t have to. Paddle ensures compliance with all tax legislation and helps you maintain good standing with potential investors.

Read more about Paddle’s sales tax compliance solutions or speak to an expert to find out how Paddle can help your business.