Texas imposes 6.25% state sales tax on many cloud-based services , including certain SaaS, IaaS, and PaaS platforms. But not all software is taxable. For startups, AI firms, and SaaS providers, knowing what counts as “taxable cloud” in Texas is critical to stay compliant and avoid audits in 2025.
Texas Sales Tax on Software: The Basics
Under Texas Tax Code §151.0101(a)(12) and Comptroller guidance, SaaS and cloud services are generally taxable as data processing or software services.
Taxable Items Include:
- SaaS (Software-as-a-Service)
- Cloud file storage and backup
- Access to hosted applications
- Subscription-based tools (CRM, ERP, email platforms)
- AI tools accessed over the internet
Sales Tax Rate:
6.25% state tax + local taxes (up to 2%) = 8.25% total in some areas
What Counts as “Taxable Cloud” in 2025?
Taxable:
| Cloud Service Type | Examples |
|---|---|
| SaaS | QuickBooks Online, Salesforce |
| Cloud Storage | Dropbox, OneDrive, Google Drive |
| AI Tools (hosted) | ChatGPT Enterprise, Jasper AI |
| Streaming software | Hosted video or audio editors |
| Hosted Development Tools | GitHub Copilot, Figma |
Not Taxable:
- Custom software development delivered offline
- Training services billed separately
- Installation of software on local machines
- Selling a software license with no support or hosting
Buyer vs Seller: Who Must Collect Tax?
If you’re selling SaaS or charging for cloud access and your customers are in Texas:
- You must register with the Texas Comptroller
- You must collect and remit sales tax
- This applies even if your company is located outside Texas
Out-of-state SaaS sellers with over $500,000 in Texas sales (economic nexus) must comply per Texas Tax Code §151.107.
Example: AI SaaS Firm in Austin
Company: CodeNeuro AI
Product: Monthly subscription for AI-powered code review
Price: $99/month
Location of Customers: 60% Texas, 40% other states
Tax Application:
- Charges 6.25% state sales tax + local tax on Texas subscribers
- Registers with Texas Comptroller
- Remits sales tax quarterly via Form 01-117 (Texas Sales Tax Report)
- Exempts customers outside Texas (unless nexus applies elsewhere)
Step-by-Step: SaaS Sales Tax Compliance in Texas
- Register with the Texas Comptroller using Form AP-201
- Determine if your software is taxable under current guidance
- Charge correct sales tax rate based on customer location
- File monthly or quarterly returns (Form 01-117)
- Keep invoices and exemption certificates for audit readiness
Conclusion
In Texas, most SaaS and cloud-based services are taxable. Whether you’re selling AI tools, productivity apps, or cloud platforms, you need to charge, collect, and remit sales tax if your users are in Texas. Get compliant before an audit forces penalties.
Call to Action
Schedule a sales tax review call with Anshul Goyal, CPA, EA, FCA to check if your cloud or SaaS business is tax-compliant in Texas. We help startups, AI firms, and software sellers stay ahead of Texas sales tax laws.
Disclaimer:
This blog is for informational purposes only. Texas sales tax law changes frequently. Businesses must verify their nexus, product taxability, and filing requirements with a qualified tax advisor.
Top 5 High-Searched FAQs
1. Is SaaS taxable in Texas?
Yes, SaaS is generally taxable as a software service under Texas law.
2. Do I need to collect sales tax if my company is outside Texas?
Yes, if you exceed $500,000 in Texas sales (economic nexus), you must collect tax.
3. What form do I file for Texas sales tax?
Form 01-117 , Texas Sales and Use Tax Report.
4. Are custom software services taxable in Texas?
No, if they are delivered offline and not hosted in the cloud.
5. How much is the total sales tax rate in Texas?
6.25% state rate + up to 2% local = up to 8.25% total.
About Our CPA
Anshul Goyal, CPA, EA, FCA advises SaaS founders, AI startups, and software companies on multistate sales tax, cloud service compliance, and IRS audits. Based in Texas, he helps clients understand digital tax rules and avoid costly state penalties.