US Pennsylvania Sales Tax on SaaS Software and Digital Products

Background

Pennsylvania has a broad sales and use tax framework for canned computer software, SaaS, digitally accessed software, streamed or downloaded digital products, apps, games, and related taxable software services. The principal sales tax rule in Pennsylvania is that canned computer software is treated as tangible personal property, and the Department expressly states that this applies whether the software is delivered on tangible media, electronically, digitally, streamed, or accessed through SaaS.

Pennsylvania Sales and Use Tax Framework

Pennsylvania imposes sales and use tax on retail sales, use, rental, and consumption of tangible personal property and taxable services. The state rate is 6%, with additional local sales or use tax of 1%  in Allegheny County and 2% in Philadelphia.

The use tax is the complementary tax. If taxable property, digital goods, software, or taxable services are purchased for delivery into or use in Pennsylvania and the seller does not collect Pennsylvania tax, the purchaser should self-assess use tax. 

This applies to both individuals and businesses.

Canned Software and SaaS

Pennsylvania treats canned computer software as tangible personal property.

This is not limited to downloaded software. Pennsylvania states that a licence to use canned software is taxable regardless of whether the software is digitally delivered, streamed, or accessed by other means. The Department also states that remotely accessed taxable software is taxable when the user is located in Pennsylvania, and if the billing address is in Pennsylvania, all users are presumed to be in Pennsylvania unless properly allocated.

How this rule translates into a case scenario: 

An Italian SaaS provider sells access to a standard CRM platform to a Pennsylvania business. Users log in through a browser. Even though the software is hosted outside Pennsylvania and nothing is physically delivered, the access is treated as taxable access to canned software if the users are located in Pennsylvania.

Customized Software

Custom software is treated much more favourably. Pennsylvania Code provides that the sale or use of custom software is not subject to tax and is treated as a nontaxable computer programming service. Custom software installation, repair, maintenance, updates, enhancements, and upgrades can also be nontaxable when they constitute custom software.

However, Pennsylvania is strict about modifications to canned software. Software designed to adapt or modify canned software for a specific customer does not convert the underlying canned software into custom software. Any exempt custom modification charge should be reasonable and separately stated.

How this rule translates into a case scenario: 

A Pennsylvania-based business hires a developer with tax residence in Lithuania to create an internal warehouse management system from scratch, based only on that company’s specifications. That is closer to nontaxable custom software.

If the same customer buys access to an existing SaaS warehouse platform and pays for configuration, Pennsylvania may tax the platform access and related configuration as canned software or alteration of tangible personal property.

Digital Products 

Pennsylvania taxes digital products delivered electronically, digitally, or by streaming. Act 84 of 2016 applied Pennsylvania’s 6 % sales and use tax to digital products delivered electronically. Digital products include video, music, books, apps, games, and canned software.

Taxable examples include:

• E-books and e-book subscriptions
• Downloaded or streamed digital video
• Digital audio, songs, ringtones, and audiobooks
• Streaming subscriptions
• Apps and games
• Add-ons to apps or games
• Online game subscriptions
• Photographs and e-greeting cards

Pennsylvania sources digital products by the customer’s billing address for state tax purposes, and Pennsylvania tax does not apply where the seller delivers the product to a customer outside Pennsylvania. 

Remote Seller

Pennsylvania’s economic nexus threshold is based only on sales volume, not transaction count. A remote seller with at least USD 100,000 in Pennsylvania gross sales has economic presence and should collect Pennsylvania sales tax. 

Sales tax threshold includes gross amounts across all channels, including taxable and nontaxable sales.

For remote sellers, the threshold is measured by calendar year, with collection beginning in the following collection period.

Foreign providers are not excluded. A non-US SaaS or digital product provider selling taxable software access or digital products to Pennsylvania customers should apply the same threshold analysis.

Marketplace Facilitators and Marketplace Sellers

Marketplace facilitators with economic nexus should collect and remit Pennsylvania sales tax on their own Pennsylvania sales and on marketplace sales made on behalf of marketplace sellers, even where the marketplace seller does not individually have a nexus.

For threshold purposes, a marketplace facilitator without physical presence should use both facilitated and direct sales to determine whether it exceeded the threshold. A marketplace seller without physical presence should use only its direct sales and marketplace sales where the facilitator does not collect on its behalf.

A marketplace seller that sells only through a marketplace facilitator that collects Pennsylvania tax may be relieved from direct collection on those marketplace sales, but direct website sales, enterprise SaaS contracts, and non-facilitated sales should still be reviewed separately.

Responsibility for Sales Tax Collection

Local providers

A Pennsylvania-based provider selling taxable canned software, SaaS access, digital products, or taxable related services should collect and remit Pennsylvania sales tax unless a valid exemption applies.

Remote providers

A remote provider should register and collect if it has Pennsylvania economic nexus, physical nexus, or another basis for maintaining a place of business in Pennsylvania. Pennsylvania’s economic threshold is more than USD 100,000 in gross Pennsylvania sales.

Marketplace facilitators

Marketplace facilitators should collect and remit on taxable facilitated marketplace sales where the facilitator has Pennsylvania nexus.

Purchasers

If the seller does not collect tax on a taxable purchase delivered into or used in Pennsylvania, the purchaser owes use tax. There is no general purchaser-side threshold that removes use tax liability. The USD 100,000 threshold determines the seller’s collection duty, not the purchaser’s taxability.

B2B and B2C Treatment

Pennsylvania sales and use tax is not limited to B2C transactions. It applies to taxable sales to Pennsylvania purchasers unless a specific exemption applies.

A Pennsylvania business buyer is not exempt merely because it is sales tax registered. If the buyer purchases taxable SaaS, canned software, digital products, or taxable software services for internal use, the remote provider should charge Pennsylvania tax if it has collection responsibility, unless the buyer provides valid exemption documentation.

Pennsylvania recognises exemptions for certain purchasers and uses, including qualified charitable organisations, religious organisations, nonprofit educational institutions, government entities, and manufacturing or research uses where the statutory requirements are met.

Resale may also apply where the buyer is genuinely reselling the software licence, but if the buyer resells access to Pennsylvania users, the buyer may need to collect tax from those Pennsylvania users.

How this rule translates into a case scenario: 

A remote provider of taxable SaaS, canned software, digital products, or related taxable services should generally charge, collect, and remit Pennsylvania sales tax on B2B transactions where the Pennsylvania buyer is a local sales tax-registered business, unless the buyer provides a valid exemption or resale certificate.

Multi-user SaaS and Sales Tax

According to the Pennsylvania sales tax framework, the usage of the SaaS subscription from different parts of a parent company that is based outside the state could still trigger local sales tax accountability. If a company buys licences for users inside and outside Pennsylvania, the Pennsylvania portion may need to be allocated.

In accordance with the applicable sales tax provision, the Department of Revenue(DOR) clarified that if the billing address of the purchaser(firm) is in Pennsylvania, all users are presumed to be in Pennsylvania. However, Pennsylvania Exemption Certificate REV 1220 allows licences to be allocated to out-of-state users.

The purchaser may allocate licences to out-of-state users where those users are employees of the purchaser. If the users are customers, contractors, or employees of another entity, the purchaser may be treated as the end user unless it is truly reselling the licence.

How this rule translates into a case scenario: 

The parent company with HQ in Pennsylvania buys 1,000 SaaS licences, but 600 employees use the software outside Pennsylvania. The buyer needs to properly document this allocation through REV 1220 allocation support to avoid tax on non-Pennsylvania users. 

If the provider simply invoices the Pennsylvania headquarters and no allocation is documented, Pennsylvania DOR may presume all users are in Pennsylvania.

Special Intricacies for Software and Digital Providers

SaaS is taxable because it is access to canned software

Pennsylvania’s approach differs from states that exempt SaaS as a service. Pennsylvania’s Department states that canned software remains taxable even where digitally delivered, streamed, or accessed by SaaS.

Labels do not control

Calling the charge a “platform fee,” “subscription,” “implementation service,” or “software service” does not determine taxability. Pennsylvania looks at economic substance and supporting documents.

Configuration and alteration are risky

Configuration, source code modification, enhancements, installation, and programming needed to make canned software functional may be taxable, especially when sold with taxable canned software.

Custom software is exempt, but narrowly defined

Custom software should be designed, created, and developed for the specifications of the original purchaser. Modifying canned software does not convert the underlying canned software into custom software.

Latest Sales Tax Updates 

Act 21/2026 changed local sales tax sourcing

A major current update is Act 21 of 2026, under which Pennsylvania requires vendors selling taxable products or services to customers in Philadelphia and Allegheny County to collect and remit local sales tax based on the destination, meaning where the product or service is delivered.

The DOR states that local sales tax is now based on the point of destination rather than generally on the vendor’s location.

This is important for remote SaaS, software, and digital product sellers because digital delivery to a Philadelphia or Allegheny County customer can now trigger the relevant local tax calculation if the seller is required to collect Pennsylvania tax.

Pennsylvania continues to treat digital products broadly as taxable

Pennsylvania’s digital products page remains clear that video, music, books, apps, games, and canned software delivered electronically, digitally, or by streaming are taxable.

Recent sourcing proposal confirms Pennsylvania view of cloud and software use

A 2026 Pennsylvania Bulletin proposal on corporate tax sourcing states that prewritten canned software is sourced as tangible personal property and that custom software services are delivered to Pennsylvania if the customer or its agents use the software in Pennsylvania, regardless of whether the software resides on a server, physical medium, or cloud outside Pennsylvania. 

Although this is corporate tax sourcing rather than sales tax collection, it reflects Pennsylvania’s broader position that cloud location does not control the Pennsylvania use analysis.

Final Remarks

Pennsylvania is a high taxability state for software and digital products. Canned software, SaaS, remotely accessed software, streamed or downloaded digital products, apps, games, e-books, digital audio, and digital video are generally taxable when delivered to or used by Pennsylvania customers.

Custom software remains generally nontaxable, but the exemption is narrow and does not convert underlying canned software into exempt custom software.

Remote and foreign providers should register and collect if they exceed USD 100,000 in Pennsylvania gross sales or otherwise have nexus. The rules apply to both B2C and B2B sales. A Pennsylvania sales tax registered business is not automatically exempt when buying software for internal use.

If the seller does not collect tax on a taxable transaction, the purchaser should self-assess use tax. A foreign filing agent can generally assist through myPATH, approved third-party software, CSP arrangements, or POA authorisation, but the provider remains responsible for compliance.

Frequently Asked Questions