Subscription App Builder

Sales Tax and VAT on Software Subscriptions: Basics for Small Sellers (2026)

How US sales tax and EU and UK VAT apply to SaaS and digital subscriptions, when a small seller has to register, and the three practical ways to handle it. General information, not tax advice.

Floot ·

Key Takeaways

  • US sales tax on SaaS depends on the state. Stripe’s guide says 25 states tax SaaS and 7 more tax it when customers must download software; the rest generally don’t.
  • You owe a state only once you have nexus there. For remote sellers that usually means passing an economic threshold, most often $100,000 of sales in a year, and a growing number of states have dropped their 200-transaction test.
  • EU and UK VAT follows the consumer. Electronic services to consumers are taxed in the customer’s country, and the UK says non-UK businesses with UK-taxable supplies must register.
  • Business customers usually change the picture. Sales to VAT-registered businesses are generally handled differently from sales to consumers, so collect business tax IDs at checkout.
  • You can do it yourself, use tax software, or use a merchant of record. Software like Stripe Tax calculates tax for you; a merchant of record such as Paddle or Stripe Managed Payments becomes the seller and handles compliance for a higher fee.

Quick-Start Prioritization Framework

Where you sellQuestion to answerWhere to check
US statesDoes the state tax SaaS, and have you passed its economic nexus threshold?Each state’s revenue department; a tax tool’s nexus tracking
EU consumersAre you established in the EU, and above or below the €10,000 cross-border threshold?EU Your Europe and OSS portals
EU businessesDid you collect and validate the customer’s VAT number?Your checkout and invoices
UK consumersAre you based outside the UK and making UK-taxable supplies?GOV.UK digital services guidance
Everywhere elseDoes the country tax foreign digital services?That country’s tax authority, or an adviser

Tax is the part of selling software that most founders put off longest, partly because the rules differ by country and, in the US, by state. The good news is that the structure is learnable: in the US the questions are whether a state taxes software subscriptions and whether you have enough sales there to owe it; in the EU and UK the question is mostly where your customer is and whether they are a business. This guide explains those rules as they stand in November 2026, with the sources to check, and the three realistic ways a small seller handles them. It is general information, not tax or legal advice. Rules change and depend on your facts, so confirm your situation with a qualified adviser before you rely on it.

The two questions behind every tax rule

Almost every rule in this guide answers one of two questions: is this product taxable where the customer is, and is this seller required to collect the tax?

Taxability

Software subscriptions are taxed differently depending on how a jurisdiction classifies them: as a service, as software, as a digital product or as something else. That classification decides whether tax applies at all, and sometimes at what rate.

Obligation to collect

Even where a product is taxable, a seller usually has to collect tax only after a trigger: physical presence, enough sales into a place, or registering voluntarily. Thresholds and triggers differ by place.

Who the customer is

Many rules split business customers from consumers. In the EU and UK especially, the treatment of a sale to a VAT-registered business differs from a sale to an individual, so knowing which you have matters at checkout.

US sales tax on SaaS

The US has no national sales tax. Each state sets its own rules, and many allow local taxes on top.

Which states tax SaaS

Stripe’s introduction to SaaS taxability in the US, updated November 2025, says 25 states tax SaaS and 7 more tax it if the customer must download the software. It gives examples: Washington treats SaaS as taxable software, and Hawaii taxes services generally. Some states tax SaaS at different rates for personal and business use.

Partial taxation: the Texas example

Some states tax only part of the price. Stripe’s guide to Texas services says the Comptroller treats hosted software as a data processing service, that SaaS subscriptions are generally taxable, and that 20% of the charge is exempt, so tax applies to 80% of the price. On a $1,000 monthly subscription, tax applies to $800.

Economic nexus: when a remote seller must collect

Since the Supreme Court’s 2018 South Dakota v. Wayfair decision, states can require out-of-state sellers to collect sales tax once they pass an economic threshold. Avalara’s summary describes the usual test as more than $100,000 of sales in the current or previous calendar year, or at least 200 separate transactions. As of April 21, 2026 it lists California, Colorado, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Massachusetts, North Carolina, North Dakota, South Dakota, Utah, Washington, Wisconsin and Wyoming (plus Alaska’s local program) as having dropped the transaction test. Kentucky’s change took effect August 1, 2026.

What that means at small scale

Worked example: a $20 a month product with 400 subscribers spread across the country makes $96,000 a year in total. Unless a large share are in one state, you are unlikely to pass a $100,000 threshold in any single state. In states that still use a 200-transaction test, though, 17 monthly subscribers make 204 charges a year, so check how each state counts transactions. Your home state is different: if you have a physical presence there and it taxes SaaS, you may owe tax from the first sale.

EU VAT on digital services

In the EU, VAT on electronic services sold to consumers is charged at the rate of the consumer’s country. The rules for a seller depend on whether the seller is established in the EU.

Sellers established in the EU

The EU’s Your Europe guidance says telecommunications, broadcasting and electronic services are always taxed in the customer’s country, and describes a €10,000 threshold for cross-border distance sales to EU consumers. Below it, these services may be taxed in the seller’s own country. Above it, the seller charges each customer’s local VAT and can use the One Stop Shop (OSS) to declare and pay it through one country instead of registering in each.

Sellers outside the EU

The EU’s OSS portal describes a non-Union scheme for any taxable person not established in the EU who supplies services to consumers in the EU. It lets a non-EU business register in one member state and file one return for all EU consumer sales of services. Many advisers treat non-EU sellers as having no threshold at all, so get advice before your first EU consumer sale.

Business customers

Sales to VAT-registered businesses in another country are generally treated differently from consumer sales, with the customer often accounting for the VAT themselves. To rely on that, you need the customer’s VAT number and correct invoices, so ask for a tax ID at checkout when the buyer is a business.

UK VAT on digital services

The UK left the EU VAT system, so it has its own rules, which look similar in shape.

Selling into the UK from abroad

GOV.UK’s guidance on digital services to private consumers says that if your supplies are liable to UK VAT, you will need to register for UK VAT if you are based outside the UK. The guidance doesn’t describe a turnover threshold for these overseas sellers.

UK businesses selling to EU consumers

The same guidance says the place of supply is where the consumer is, and that UK businesses must either register for the EU’s non-Union scheme in one member state or register in each EU country where they supply consumers.

Other countries

Many countries outside the EU and UK also tax digital services sold by foreign businesses to their residents, and set their own registration thresholds. If a meaningful share of your customers is in one country, check that country’s tax authority or ask an adviser. Tax software and merchants of record publish the list of countries they cover, which is a useful starting map.

Three ways small sellers handle it

There is no single right answer. The choice is mostly about how much you sell abroad and how much time you want to spend on compliance.

Do it yourselfTax software (e.g. Stripe Tax)Merchant of record
Who is the sellerYouYouThe MoR
Who calculates taxYouThe softwareThe MoR
Who registers and filesYouYou, or a paid filing planThe MoR
Published cost exampleYour time and an accountantStripe Tax Basic: 0.5% per transaction where registered (no-code)Paddle: 5% + 50¢ per checkout transaction
Best forMostly domestic sales in a state or country that doesn’t tax SaaSGrowing sellers who want control and lower feesSellers with many countries and no time for filings

Do it yourself

Reasonable when almost all your customers are in one place and you know the rules there. Keep records of each customer’s location and whether they are a business, because you will need them if you cross a threshold later.

Tax calculation software

Stripe Tax calculates and collects tax at checkout. Its pricing page lists Tax Basic at 0.5% per transaction where you’re registered for no-code integrations, or 50¢ per transaction through the API, and Tax Complete plans that add registration and filing from $90 a month on a one-year contract. You remain the seller and are still responsible for registering where required.

Merchant of record

A merchant of record resells your product, so the tax obligations are theirs. Stripe’s docs say Managed Payments handles sales tax, VAT and GST compliance in more than 80 countries for eligible digital products, at 3.5% on top of payment fees. Paddle’s pricing page lists 5% + 50¢ per checkout transaction with tax filing included.

Common mistakes

Most tax problems for small sellers come from not collecting the information they would later need.

  • Assuming software is never taxable because it isn’t a physical product.
  • Not recording each customer’s country, state and postal code at checkout.
  • Not asking business customers for their VAT or tax ID.
  • Watching only total revenue and missing a state’s threshold, or a transaction-count test.
  • Treating a merchant of record and tax calculation software as the same thing.
  • Showing prices without saying whether tax is included, which surprises consumers in VAT countries.
  • Waiting until a tax notice arrives to start keeping records.

If you’d rather not build the checkout yourself

If you’d rather not build checkout and customer records by hand, Floot can build the subscription app from a plain-English description, with Floot Payments (paid out via Stripe) for checkout and a Postgres database for customer details. Floot does not file or remit sales tax or VAT, so the decisions in this guide still apply; check with a tax adviser.

Frequently Asked Questions

Do I have to charge sales tax on SaaS in the US?

It depends on the state and on whether you have nexus there. Stripe’s guide says 25 states tax SaaS and 7 more tax it when software must be downloaded. Remote sellers generally owe a state only after passing its economic nexus threshold, commonly $100,000 of sales in a year. This is general information, not tax advice.

Do I need to charge VAT to EU customers if my business is in the US?

For consumers, generally yes: electronic services are taxed in the customer’s country, and the EU offers a non-Union OSS scheme for non-EU businesses to register in one member state. For VAT-registered business customers the treatment usually differs. Confirm with an adviser before your first EU sale.

What is the €10,000 EU VAT threshold?

The EU’s Your Europe guidance describes a €10,000 threshold for cross-border distance sales to EU consumers by EU-established businesses. Below it, electronic services may be taxed in the seller’s own country; above it, the seller charges each customer’s local VAT, usually through OSS.

Does the UK have a VAT threshold for foreign digital sellers?

GOV.UK’s guidance says that if your supplies to UK consumers are liable to UK VAT and you are based outside the UK, you need to register for UK VAT. It doesn’t describe a turnover threshold for these sellers.

What is a merchant of record?

A company that sells your product to the customer on your behalf, so it is responsible for collecting and filing sales tax and VAT. Examples include Paddle, Lemon Squeezy, Polar and Stripe Managed Payments. They charge more per transaction than a standard payment processor.

Does Stripe file my sales tax for me?

Stripe Tax Basic calculates and collects tax; you are still responsible for registering and filing, though Stripe’s Tax Complete plans add filing. Stripe Managed Payments, its merchant of record product, takes on tax compliance for eligible digital products.

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