SaaS and Sales Tax Confusion: State Exemptions and Local Challenges in Illinois, Colorado, and Louisiana

The taxation of Software-as-a-Service (SaaS) in the United States remains a challenge for remote sellers following the South Dakota v. Wayfairdecision in 2018. This decision reshaped sales tax compliance through the introduction of economic nexus rules, which mandate that businesses without a physical presence collect and remit sales tax in jurisdictions where they exceed certain sales or transactional thresholds. 

For SaaS providers, challenges stem from inconsistent classifications of SaaS as either a taxable or non-taxable service, taxable or non-taxable tangible personal property, or taxable or non-taxable leased product across state and local jurisdictions. In Illinois, Colorado, and Louisiana, state-level exemptions often differ significantly from local tax impositions.  

Illinois 

In Illinois, SaaS is generally exempt from state sales tax, as it is classified as a non-taxable service under the Retailers’ Occupation Tax Act. The state’s economic nexus threshold, set at $100,000 in sales or 200 transactions (35 Ill. Comp. Stat. Ann. 105/2, does not apply to SaaS at the state level due to this exemption.  

However, the City of Chicago imposes a significant local tax on SaaS through the Personal Property Lease Transaction Tax (PPLTT), which treats SaaS as a lease of personal property. As of January 1, 2025, the PPLTT rate is 11%, applied to cloud-based services used within Chicago, as codified in Chicago, Ill., Municipal Code § 3-32 (2025).  

Businesses with $100,000 in receipts from Chicago customers over four consecutive quarters are subject to this tax (Chicago, Ill., Municipal Code § 3-32-020, which covers subscription fees, license fees, and related charges, with limited exemptions for de minimis transactions (Chicago, Ill., Municipal Code § 3-32-050). Businesses must accurately identify Chicago-based customers to apply the 11% tax and maintain detailed records to mitigate risks of retroactive enforcement. 

Colorado 

Colorado presents a similar dichotomy, with SaaS exempt from state sales tax but subject to local taxes in certain jurisdictions. The state classifies SaaS as a non-tangible service, excluding it from sales tax under Colo. Rev. Stat. Ann. § 39-26-104.  

Colorado’s economic nexus threshold of $100,000 in sales (Colo. Rev. Stat. Ann. § 39-26-102(7)) does not apply to SaaS at the state level due to this exemption. However, home-rule cities like Denver have the authority to impose their own sales taxes, which may include SaaS. In Denver, SaaS is taxable at a rate of approximately 5.15%, treated as a taxable service under the city’s sales tax framework, as authorized byDenver Rev. Munic. Code Ch. 53.  

The Denver Tax Guide Topic No. 18 explains that subscription fees and mandatory service charges for SaaS are taxable. Local nexus rules in Denver may align with the state’s $100,000 threshold (Denver Rev. Munic. Code § 53-95), but businesses must verify specific requirements, as other home-rule cities like Boulder and Colorado Springs may also tax SaaS.  

Louisiana 

Louisiana’s SaaS taxation framework has undergone significant changes, with the state imposing a 5% sales tax on SaaS and other digital products effective January 1, 2025, following the passage of House Bill 8 and House Bill 10 in 2024. This tax, codified in La. Rev. Stat. Ann. § 47:302(K), marks a departure from prior exemptions. 

The state’s economic nexus threshold is $100,000 in sales or 200 transactions (La. Rev. Stat. Ann. § 47:301(4)), requiring businesses meeting these criteria to collect and remit the 5% state sales tax (La. Rev. Stat. Ann. § 47:302(A)). Additionally, local parishes such as Jefferson Parish may impose their own sales taxes, which apply to SaaS, with rates around 4.75% or higher, depending on the jurisdiction (La. Rev. Stat. Ann. § 47:337.9).  

These local taxes, authorized under La. Rev. Stat. Ann. § 47:337.10 , align with the state’s nexus threshold (La. Rev. Stat. Ann. § 47:337.4), but specific parish ordinances must be consulted for precise rates and rules. Louisiana’s unique tax system, which combines state, parish, and municipal taxes, requires businesses to calculate taxes based on customer locations and stay current on legislative changes. 

Practical Implications for SaaS Providers 

The discrepancy between state and local tax treatments in these jurisdictions highlights SaaS providers' compliance challenges. Remote sellers must remain vigilant about nexus-creating activities, as overlooking local thresholds can lead to significant tax exposure and penalties. Failure to recognize local tax obligations, such as Chicago’s PPLTT or Denver’s sales tax, can result in noncompliance, especially as jurisdictions increasingly scrutinize remote sellers following the Wayfair decision.  

SaaS providers must adopt strategies tailored to the specific requirements of these jurisdictions. Automated tax solutions can streamline the calculation of state and local taxes, particularly in Chicago, Denver, and Jefferson Parish, where rates and rules vary. Regular monitoring of sales and transaction volumes against economic nexus thresholds—$100,000 in Chicago receipts, potentially $100,000 in Denver, and $100,000 or 200 transactions in Louisiana—is also recommended. 

Acting as a further nuisance, SaaS providers must also consider tax compliance solutions that are capable in solving the puzzle between being able to exempt certain transactions on a state level, while being able to properly calculate tax on the locality level. While this does not seem to be a complicated task, businesses must engage with proper compliance tools to accommodate this uphill challenge.  

SaaS Tax Solutions from Sales Tax Helper 

The taxation of SaaS in Illinois, Colorado, and Louisiana reflects a complex interplay of state exemptions and local impositions. SaaS providers can minimize tax exposure by grounding compliance with the cited legal authorities and implementing automated tax solutions, location tracking, and professional guidance.  

If your business needs help with SaaS tax compliance, the skilled attorneys and CPAs at Sales Tax Helper can help. Contact us today to discuss your sales tax issues and take the first step toward ensuring compliance with state and local tax regulations.