Connecticut’s classification of Software as a Service (SaaS) as a taxable service significantly affects its taxability compared to tangible personal property. This distinction determines how SaaS offerings are taxed and the obligations of businesses providing these services.

Service Classification: By categorizing SaaS as a taxable service, Connecticut mandates that businesses charge the standard sales tax rate of 6.35% on their subscriptions and usage fees. This classification applies regardless of whether the software is accessed online or downloaded, emphasizing the service nature of SaaS.

Tangible Personal Property Classification: If SaaS were classified as tangible personal property, it would only be taxed when delivered on physical media, such as CDs or USB drives. This limited scenario does not align with modern SaaS delivery methods, which are predominantly cloud-based.

Tax Obligations: As a service, SaaS providers must ensure accurate tax collection from the outset, integrating sales tax into their pricing models. This affects how businesses structure their billing and invoicing processes, requiring meticulous tax compliance.

Business Impact: This classification broadens the tax base, ensuring that digital services contribute fairly to state revenues. However, it also increases the tax burden on SaaS providers, necessitating robust tax management systems to handle compliance efficiently.