Joshua D'Costa
Growth & Marketing
Jan 22, 2025
|
8
min
Software as a service (SaaS)-based businesses in India can often find understanding U.S. sales and use tax regulations daunting and complex. With the SaaS market in India projected to reach U.S. $3.74 billion in 2025 and expected to grow to a market volume of U.S. $9.22 billion by 2029, the stakes for compliance are higher than ever.
Tax compliance in the United States can be difficult for SaaS businesses, particularly MicroSaaS founders, indie hackers, and solopreneurs. Each state has its own set of rules, economic nexus thresholds, and taxation definitions, making it extremely difficult for small teams with limited resources to remain compliant.
But here’s the good news: a Merchant of Record (MoR) can simplify these challenges, allowing you to focus on growing your business.
Let’s unpack the complexities of U.S. tax compliance and show you how MoRs like Dodo Payments provide end-to-end solutions tailored for MicroSaaS businesses.
Understanding SaaS Tax Compliance in the U.S.
What Makes SaaS Taxable?
In the United States of America, SaaS taxability is determined by the jurisdiction. It depends upon which state it’s purchased in if the SaaS product is used for personal use or for business. Some states consider SaaS a taxable service, while others exempt it entirely. For instance;
In the state of Ohio, SaaS is taxable for business use not for personal use. SaaS is taxable for personal use in the state of Iowa but not taxable for business use. In Connecticut SaaS is taxed at 1% for business use and at the standard use for personal use.
In Alaska, there are no state taxability rules, but buying SaaS is considered as a sale of the property so it is taxed on that basis.
New York, Texas, and Hawaii impose sales tax on SaaS services. California, Colorado, Florid, and other states view SaaS as a non-taxable service unless there’s a tangible component involved.
Source: TaxJar
This makes it clear how complex and difficult the tax laws are in the United States if we look at the state-to-state basis. It’s going to get more complicated by the fact that the state, which does not have any sales tax on SaaS, might have it in the future as the digital economy and SaaS industry grows.
Economic Nexus and Its Impact
Economic Nexus refers to a business that establishes a connection with a state based on economic activity, such as revenue or the number of transactions conducted within that state.
Unlike traditional physical nexus, which requires a business to have a physical presence like an office or employees in a state, economic nexus focuses solely on sales thresholds.
This concept gained prominence after the 2018 Supreme Court decision in South Dakota v. Wayfair, which allowed states to impose sales tax obligations on remote sellers.
Some states have adopted an annual sales threshold of $100,000 or 200 transactions as the benchmark for triggering economic nexus, although some states have started eliminating the transaction threshold to simplify compliance.
For example, Alaska plans to remove its transaction threshold in 2025, and New Jersey is considering similar legislation.
Challenges That SaaS Businesses Face
Economic nexus can significantly complicate tax compliance for SaaS businesses, as software and subscription services are taxed differently across states.
SaaS companies without a physical presence in a state may still be liable for sales tax if they meet the state’s economic nexus threshold. This means SaaS providers need to monitor their sales data meticulously across all 50 states and stay updated on varying tax laws.
The administrative burden can grow when navigating the over 13,000 U.S. tax jurisdictions, each with unique rules, rates, and exemptions.
SaaS Founders may need to calculate and remit taxes for subscription fees, digital products, and even bundled services.
SaaS Founders companies must also register, file, and pay taxes in multiple states where they surpass thresholds, regardless of their physical presence.
Without solid compliance solutions, Founders can risk penalties for underpayment or non-compliance. Many are turning to automation tools or Merchant of Record (MoR) services to handle tax liabilities, ensure accuracy, and manage filings across jurisdictions.
How a Merchant of Record Can Simplify Tax Compliance
A Merchant of Record will take on the role of the official seller of your SaaS product, managing everything from billing to tax compliance. Here’s how an MoR can tackle the challenges of U.S. tax compliance:
1. Automated Tax Collection and Remittance
A Merchant of Record automates the calculation, collection, and remittance of sales tax across all states. This eliminates the need for manual tracking and ensures that your business stays compliant, even in states with complex rules.
2. Audit and Chargeback Protection
Tax audits can be daunting, a Merchant of Record will take this burden off by handling audit requests and disputes on your behalf. Additionally, they manage chargebacks, ensuring your revenue isn’t disrupted by disputes.
3. Localized Payment Solutions
Some Merchant of Records like Dodo Payments help with regional payment preferences like UPI in India, enabling seamless global operations while remaining compliant in each jurisdiction.
How Dodo Payments Can Help?
Dodo Payments specializes in providing MicroSaaS founders, indie hackers, and solopreneurs with solutions designed to simplify their operations. Here’s why it’s the right choice for tax compliance:
Compliance Management: Dodo Payments will ensure your transactions meet all legal requirements from automating tax calculations to managing international regulations, covering every aspect of U.S. tax compliance.
Subscription Billing Automation: Not just compliance, Dodo Payments streamlines subscription billing with features like automated billing and detailed invoicing.
Automated Tax Calculations: Dodo Payments will automatically calculate correct tax rates like GST, VAT, etc, with detailed reporting, ensuring you’re always prepared for audits.
Conclusion
By partnering with a Merchant of Record, you can offload the complexities of tax compliance while focusing on what matters most;
Building customer trust when your business complies with tax regulations as it enhances your credibility, encouraging loyalty and long-term relationships.
Minimizing legal risks of penalties and ensuring uninterrupted operations.
A Merchant of Record like Dodo Payments not only manages tax compliance but also simplifies expansion into new markets, making it easier to grow your SaaS business globally.
Ready to simplify your tax compliance?
Explore Dodo Payments today and unlock the full potential of your SaaS business.
