Digital products and technology services continue to blur the traditional line between taxable property and nontaxable services. For multistate businesses, the practical problem is simple: the same cloud-based product can produce very different sales tax results depending on where the customer is located, how the product is described, and what the customer is purchasing.
That issue has become even more important in 2026.
Washington: Expanded Sales Tax on Technology Services
Washington significantly expanded its retail sales tax base effective October 1, 2025, bringing services such as custom software, customization of prewritten software, information technology services, and certain digital automated services into the retail sales tax regime. The Washington Department of Revenue continued rulemaking and interim guidance through 2026, meaning technology companies should not assume their historical treatment remains correct.
California and Colorado: Software Tax Changes Beginning in 2027
California and Colorado are now preparing for major changes of their own. California SB 122, signed June 29, 2026, will subject prewritten software delivered electronically or accessed remotely, including SaaS, to sales and use tax beginning January 1, 2027, while retaining exclusions for items such as custom software and certain digital infrastructure. Colorado HB 26-1223, likewise, changes software taxability beginning January 1, 2027 by repealing the state exemption for most downloadable software, while preserving exemptions for software developed for a particular user and software governed by a negotiable license agreement. These changes are discussed in greater detail in Source Advisors’ recent article on California and Colorado software taxability, available here.
New York: Sales Tax on Prewritten and Remotely Accessed Software
New York takes another approach. Prewritten software is taxable whether delivered on physical media, electronically, or through remote access. New York also sources remotely accessed software based on where the purchaser uses or directs the use of the software. A business with users in multiple states may therefore need employee-location or user-location data rather than simply relying on the customer’s headquarters or billing address.
Texas: Taxation of SaaS and Data Processing Services
Texas adds a different layer of complexity. The Texas Comptroller treats many SaaS offerings as taxable data processing services. Twenty percent of the charge for taxable data processing services is exempt, so tax generally applies to the remaining 80 percent. Texas also distinguishes taxable data processing from professional services that merely use computers as tools, which can be significant for companies selling analytics, automation, bookkeeping, consulting, or AI-enabled services.
Wisconsin: Treatment of SaaS and Prewritten Software
Wisconsin demonstrates why a national “SaaS is taxable” rule is equally unreliable. Wisconsin guidance generally treats charges for remotely accessing prewritten software as nontaxable when the customer does not operate or control the provider’s server and the provider is not otherwise selling a taxable product or service. Downloaded prewritten software and certain digital goods, however, can be taxable. The contract, product functionality, and method of delivery therefore matter.
Pennsylvania: Sales Tax on Digital Products and Software
Pennsylvania broadly taxes digital products transferred electronically, including canned software, apps, digital media, and certain subscriptions. For sourcing purposes, Pennsylvania generally looks to the customer’s billing address on file. Compare that with New York’s focus on where remotely accessed software is actually used, and it becomes clear why one customer-address field may not be sufficient for every jurisdiction.
Illinois: Economic Nexus Changes for 2026
Illinois presents another 2026 compliance issue. Effective January 1, 2026, the state eliminated the 200-transaction economic nexus threshold for remote retailers and marketplace facilitators, leaving the $100,000 gross-receipts test. Changes like this illustrate that a company’s sales tax obligations may shift even when its products, customers, and business model have not changed.
Changing Sales Tax Rules Create Compliance Risk
These differences create practical risks. Product descriptions used by sales teams may not match the tax characterization applied in billing systems. Bundled invoices may combine taxable software, implementation, training, support, and consulting. Customer location data may be incomplete. Tax engines may still be configured using assumptions that were correct when implemented but have since changed.
Multistate Sales Tax Compliance
Businesses should periodically review their products and services state by state, particularly after launching new offerings, entering new markets, changing contract language, or implementing new billing and tax automation systems. A useful review should evaluate nexus, product taxability, sourcing, exemptions, invoice presentation, and the underlying data used by the tax engine. It should also document why each conclusion was reached so the business is prepared if a state later questions the treatment.
For technology and service companies, sales tax compliance is no longer simply a question of whether “software” is taxable. The better question is what the customer receives, where the customer receives or uses it, and how that state classifies the transaction.
Source Advisors can help businesses evaluate multistate sales taxability, sourcing, nexus, and system configuration to reduce exposure and build a defensible compliance approach as state rules continue to evolve.
Sources
- Washington Department of Revenue, “ESSB 5814 interim guidance and upcoming rule-making.”
- California SB 122 summary, Avalara, June 30, 2026.
- Colorado General Assembly, HB 26-1223, “Modifying Certain Tax Expenditures.”
- Source Advisors, “States Are Expanding Sales Tax to SaaS and Digital Products: What Businesses Need to Know.”
- New York State Department of Taxation and Finance, Tax Bulletin ST-128, “Computer Software.”
- Texas Comptroller of Public Accounts, “Taxable Services – Data Processing Services.”
- Wisconsin Department of Revenue, “Sales and Use Tax Treatment: Computer Hardware, Software, Services.”
- Pennsylvania Department of Revenue, “Tax on Digital Products.”
- Illinois Department of Revenue, FY 2026-12, “Destination-Based Retailers’ Occupation Tax Changes.”
