No. Software as a service (SaaS) is not taxable in the state of Oklahoma.
The state does tax most prewritten software that is delivered on tangible media (such as a USB drive), classifying it as a type of personal property (as defined in Oklahoma Code §68-1352). But Oklahoma Code §68-1357(32) clearly states that SaaS, as well as all electronically delivered software, is not subject to state sales tax.
In fact, sales and use tax is not applied to any digital goods in the state.
This guide explains the rules surrounding the taxation of SaaS in more detail, as well as why compliance with sales tax requirements is essential.
Why compliance matters
If you sell SaaS, you need to know the rules surrounding its taxation in every state where you have customers.
That's because, as Numeral has revealed, close to half of all states now tax SaaS.
And if you fail to collect tax on your eligible SaaS sales and/or don't file your sales tax returns and remit payments on time, you could be subject to fines and penalties.
Taxation rules in Oklahoma
If you provide SaaS to Oklahoma residents, those sales are not taxed in the state..
Oklahoma does tax prewritten software as a type of personal property — if it is delivered on a physical item. Prewritten software is defined in Oklahoma Code §68-1352 as "computer software … which is not designed and developed by the author or other creator to the specifications of a specific purchaser."
Prewritten software also includes software that has been designed for a specific person but sold to others. Enhancing or modifying prewritten software to the specifications of a particular person does not change it from falling under the definition of prewritten software; therefore, it is still considered taxable as personal property.
However, Oklahoma Code §68-1357(32) exempts all electronically delivered software from sales tax — that is, "any prewritten software that's delivered to the purchaser by means other than tangible storage media." So unless software is delivered on a CD, USB, or other physical device, you don't have to charge sales tax when you sell it.
Other rules for taxing digital goods and services
Beyond the specific rules applied to software, Oklahoma Administrative Code §710:65-19-156 also states that "charges for providing access to the Internet are not subject to Oklahoma's sales tax, since they do not clearly fall within the levy on telecommunications services."
Other nontaxable Internet-related services and transactions include:
- Charges for the design, creation, or storage of information for a homepage or website on any server.
- Charges for setup, technical fees, scanning, or domain registration for the storage of information or for a website or homepage.
- Charges for electronic data processing services, including data manipulation.
- Sales of Internet advertising space if the ads fall within the category of electronic media.
On the flip side, the law makes clear that certain Internet-related transactions are taxable, including:
- Sales of prewritten computer software on tangible media (as mentioned above).
- The lease or purchase of routers.
- Dedicated lines, ports, and other hardware or software solutions used by internet providers to deliver service.
While Oklahoma doesn’t tax SaaS, you might still want to think about compliance
Although you don’t need to collect and pay sales tax when you sell SaaS to Oklahoma residents, Oklahoma is probably not the only state where you’re doing business if you're selling software online. Sales tax laws (and the taxability of SaaS) vary greatly from state to state, and even from jurisdiction to jurisdiction within some states.
For example, in neighboring states like Texas and New Mexico, software-as-a-service sales are taxable. And just two states over, in Chicago, SaaS is taxable under PPLTT despite its non-taxable status in Illinois.
In fact, if you do business in more than one state, then compliance with sales tax rules can quickly become complicated, as you must collect sales tax in every place where you have nexus — in other words, every place where you have a physical presence or where you reach a certain sales threshold.
Understanding nexus
Having nexus in a state means that you are required to collect tax on eligible sales there. Nexus can be physical or economic.
Physical nexus is simply a physical presence — for instance, an office, inventory, or employees — within a state's borders.
In the past, nexus could be established only by a physical presence. But in 2018, with a ruling in South Dakota v. Wayfair, Inc., the U.S. Supreme Court allowed states to set thresholds for economic nexus. These nexus thresholds vary from state to state, but they are based on sales revenue and/or the number of separate sales within a state.
In Oklahoma, for example, you are required to collect sales tax if you have physical nexus as defined in Okla. Admin. Code § 710:50-17-3. You may have physical nexus in the state if you:
- Own an office, warehouse, distribution or sales house, or any other physical place of business in Oklahoma.
- Have employees, contractors, or agents that operate in Oklahoma on a temporary or permanent basis, regardless of whether they have any specific authorization to do business in the state.
- Own a stock of goods used to fulfill orders for your business that are in the hands of any non-employee representative or distributor in Oklahoma.
Oklahoma also has rules for establishing economic nexus. Specifically, you establish economic nexus when you have $100,000 or more in taxable sales in the state during the current or prior calendar year.
Other states have their own rules, which may be different from Oklahoma's. If you’re doing business with or selling items to residents in any state, you must find out that state’s economic and physical nexus thresholds and keep track of whether you’ve met them.
That's because, as soon as you do, it's time to register to pay sales tax and make sure that you’re following all the local rules, including taxing SaaS if it is deemed taxable.
Staying compliant nationwide
Every SaaS business and seller of digital goods needs to fulfill specific requirements, as set forth by state and local taxing authorities, once they have established economic or physical nexus. This means:
- Registering to collect sales tax.
- Collecting the correct amount by taxing only taxable goods and by taxing those goods at the correct rate.
- Filing sales tax forms with the state on the required schedule.
- Paying the full amount of sales tax you collected to the state's department of revenue or other local taxing authority on the required schedule.
Numeral tracks nexus for you, keeps you updated with alerts on your status, registers for you when you establish nexus, and collects the correct amount of taxes due, based on the local rules where you're selling, including rules covering the taxability of SaaS.
Tax laws change frequently, and lawmakers in many states are considering changes to the way that digital goods are taxed. With all this complexity, using a tool like Numeral is an invaluable way to ease your compliance burden and ensure that you're always following the most up-to-date rules.
Additional resources for staying compliant
It’s important to keep up-to-date on changes to the law in case Oklahoma moves to make SaaS taxable in the future. Some resources that can help include:
- The Oklahoma Tax Commission's website
- The Tax Commission's guide to sales tax
- The University of Oklahoma's sales and use tax rate locator
By keeping abreast of any modifications, you can ensure that you remain in full compliance. You can also trust Numeral to monitor changes for you so you don't have to worry about this issue.
Final thoughts
SaaS is not taxable in Oklahoma, but it is taxable in many other states. You should keep up-to-date on legal changes by consulting state resources regularly.
Alternatively, you can ease the burden and avoid constantly keeping up with the latest news by outsourcing sales tax compliance to a company like Numeral.
