Is SaaS Taxable in Minnesota? Minnesota Sales Tax Rules for Software, Online Hosting, and Digital Products
In Minnesota, SaaS and online hosted software subscriptions are generally not subject to sales tax when customers do not obtain ownership or possession of the software. Minnesota distinguishes between prewritten software, custom software, and online hosted software. Prewritten software is taxable, while qualifying custom software and online hosted software subscriptions are generally non-taxable. Certain digital products are taxable.
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Minnesota SaaS Sales Tax: Online Hosted Software Is Generally Non-Taxable
Minnesota distinguishes between different types of software transactions:
- prewritten software;
- custom software;
- online hosted software.
The tax treatment depends on whether customers obtain ownership or possession of the software.
Prewritten Software Is Taxable
Minnesota defines prewritten computer software as canned or prewritten software programs.
Examples:
- standard software programs;
- software licenses;
- commercially available applications.
Example:
Standard accounting software license USD 1,000
These transactions are generally taxable.
Custom Software Is Generally Non-Taxable
Custom software is software created specifically for a customer’s needs.
It generally involves:
- customer consultation;
- requirements analysis;
- customized development.
Example:
Custom ERP development USD 50,000
Fees charged for qualifying custom software are generally not taxable.
Online Hosted Software (SaaS) Is Generally Non-Taxable
Minnesota defines online hosted software as software that:
- is accessed through the Internet;
- is installed and hosted remotely;
- is owned by the software manufacturer or third-party provider.
Example:
Cloud CRM subscription USD 500/month
Customer:
- accesses software online;
- does not own the software;
- does not possess the software.
Subscriptions to online hosted software are generally not taxable.
Maintenance and Upgrades for Hosted Software
Charges for maintenance or upgrades related to online hosted software are generally not taxable, even when separately stated.
Example:
Hosted software subscription USD 500/month
Maintenance fee USD 100/month
Both charges are generally non-taxable when related to qualifying hosted software.
Minnesota Digital Products Tax Rules
Minnesota taxes certain digital products.
Taxable Digital Products
Includes:
- digital audio works;
- digital audiovisual works;
- digital books;
- digital codes providing access to taxable digital products;
- e-greeting cards;
- online video or computer gaming.
Non-Taxable Digital Products
Includes:
- digital news articles;
- charts and graphs;
- data reports;
- financial reports;
- digital photos and drawings.
Common Minnesota SaaS Compliance Issues
Assuming all software is taxable
Minnesota distinguishes between prewritten, custom, and hosted software.
Ignoring ownership transfer
SaaS provides access, while software sales may transfer ownership or possession.
Confusing SaaS with digital products
Businesses should classify products correctly.
Unclear contracts
Contracts should distinguish:
- hosted software access;
- software licenses;
- custom development.
Compliance Tips for SaaS Businesses
Businesses selling SaaS in Minnesota should:
- Determine whether software is hosted online;
- Confirm whether customers obtain ownership or possession;
- Separate prewritten and custom software;
- Classify digital products correctly;
- Maintain contracts and transaction records.
Conclusion
Minnesota software tax treatment depends on software classification:
- Prewritten software: Taxable;
- Custom software: Non-taxable;
- Online hosted software (SaaS): Non-taxable;
- Certain digital products: Taxable.
For SaaS businesses, the key question is whether customers purchase software ownership or only receive online access.
Sources
Minnesota Department of Revenue — Computer Software and Digital Products https://www.revenue.state.mn.us/guide/computer-software-and-digital-products