Kansas SaaS Sales Tax: Software Classification Determines Taxability

Kansas determines software taxability primarily based on whether software is classified as:

• custom software; or
• prewritten software.

The main rules are:

• Prewritten software: Taxable
• Custom software: Tax-free

Businesses selling SaaS and software products should focus on the nature of the software rather than simply the delivery method.

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Prewritten Software Is Generally Taxable

Kansas taxes sales of prewritten computer software.

Prewritten software generally includes:

• standardized software products;
• software intended for repeated sale;
• commercial applications.

Example:

Standard accounting software USD 1,000

The transaction is generally subject to Kansas sales tax.

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Custom Software Is Generally Exempt

Kansas provides different treatment for customized software.

Software may qualify as custom software when it is:

• developed specifically for a customer;
• not intended for general sale;
• designed according to unique customer requirements.

Example:

Custom software development USD 50,000

A qualifying custom software transaction is generally tax-free.

Businesses should maintain:

• development agreements;
• project documentation;
• customer requirements;
• invoices.

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Software Modification and Maintenance Services May Be Taxable

Kansas also taxes certain services related to prewritten software.

Taxable services include:

• modifying software;
• altering software;
• updating software;
• maintaining software.

Example:

Software maintenance agreement USD 200/month

When related to prewritten software, these services are generally taxable.

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SaaS Requires Software Classification Analysis

SaaS businesses commonly provide:

• cloud software access;
• subscription software;
• hosted applications.

Kansas focuses on whether the software is:

• prewritten software; or
• custom software.

Example:

Standard SaaS Platform

The same software is provided to multiple customers.

This generally resembles prewritten software.

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Custom SaaS Platform

Software is developed specifically for one customer.

This may qualify as custom software.

Businesses should analyze the actual product structure rather than relying only on labels such as “subscription.”

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Common Kansas SaaS Compliance Issues

Assuming SaaS is automatically exempt

Kansas does not determine taxability solely based on SaaS delivery.

The key question is whether software is custom or prewritten.

Misclassifying standard software as custom software

Software sold repeatedly to multiple customers generally does not become custom software simply because of contract wording.

Ignoring maintenance and updates

Software-related services may also be taxable.

Failing to document software classification

Businesses should maintain:

• contracts;
• product descriptions;
• development records;
• customer requirements.

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Compliance Tips for SaaS Businesses

Businesses selling SaaS or software products to Kansas customers should:

1. Determine whether software is custom or prewritten;
2. Identify whether software is intended for repeated sale;
3. Separate software and maintenance charges;
4. Maintain documentation supporting classification;
5. Use accurate invoice descriptions.

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Conclusion

Kansas software tax treatment depends primarily on software classification:

• Prewritten software: Taxable;
• Custom software: Tax-free;
• Modification, update, and maintenance services related to prewritten software: Taxable.

For SaaS businesses, the key issue is identifying whether the product is a standardized software offering or a truly customized software solution.

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Sources

Kansas Department of Revenue — EDU-71R Information Guide https://www.ksrevenue.gov/pdf/edu71r.pdf

Kansas Department of Revenue — Pub 1510 Sales Tax Information https://www.ksrevenue.gov/pub1510.html#3