As more SaaS startups scale in California, founders are facing unexpected tax classifications especially when their platforms involve communications, data transmission, or streaming. One area drawing scrutiny is whether SaaS services are subject to Public Utility Tax (PUT) under California’s rules or local ordinances.
Although California doesn’t impose a state-level sales tax on most SaaS subscriptions, local governments and utility regulators are increasingly looking at tech-enabled services including collaboration tools, AI software, and cloud platforms through the lens of telecommunications and utility taxation.
This blog explores whether California’s Public Utility Tax could apply to your SaaS product, which triggers to watch for, and how to structure your revenue model to reduce exposure.
What Is Public Utility Tax (PUT)?
In California, certain cities and municipalities impose Public Utility Taxes on services such as:
- Electricity
- Gas
- Water
- Cable TV
- Telephone or VOIP
These taxes are local, not state-level, and are usually levied as a percentage of gross receipts billed to customers. Rates vary by city from 1% to 11%.
Why SaaS Founders Should Pay Attention
Some SaaS products blur the line between software and telecom:
- VOIP-based platforms (e.g. AI calling, chat, conferencing)
- Communication APIs (e.g. Twilio, Zoom integration)
- SaaS with embedded telephony or video services
If your product includes two-way audio/video, virtual numbers, or data transmission infrastructure, local tax authorities may argue that it falls under “communications utility” subjecting it to local utility taxes.
Even resellers or white-labeled API-based tools could be caught in this net if they bill end users directly for usage.
Example: PUT Imposed on Cloud-Based Video Tool
Scenario:
A Bay Area SaaS startup offers embedded video conferencing in its customer service platform. It uses a third-party communications API and passes VOIP fees through to clients.
, the City of San Jose classifies it as a communications provider, requiring:
- Registration for local PUT
- Collection of up to 5% gross receipts tax from end users
- Monthly PUT remittance to the city
If not registered properly, the company may face back tax assessments and interest.
What Triggers Public Utility Classification?
You may fall under local utility tax rules if:
- You provide voice or video communication services, directly or via API
- You assign phone numbers, facilitate text messaging, or offer chatbots with voice features
- Your customers use your platform for telecommunications purposes, billed on usage or flat fee
Even if your core product is “software,” revenue from embedded communication features can be separately taxed.
SaaS Companies at Higher Risk
- AI customer support platforms with outbound/inbound voice
- E-learning or healthcare apps with video calling
- CRM tools offering virtual phone lines or SMS
- HR platforms issuing VOIP-based employee contact tools
Step-by-Step: Reduce Your PUT Exposure
- Review Your Feature Set
Determine if your SaaS app includes telecom or transmission components, especially if billed as a separate line item. - Check Local PUT Ordinances
Cities like San Francisco, Los Angeles, San Jose, Sacramento, and Oakland have utility tax rules that apply to telecom services. - Segment VOIP and SaaS Revenues
Consider structuring telecom pass-throughs under a separate billing item or legal entity. - File for a Local Business License or Utility Certificate
Some cities require providers to register before offering communication services to local users. - Track Customer Location
PUT is often sourced to the customer’s billing address. Keep a clean audit trail.
Key Local Codes and Guidelines
| City | Typical PUT Rate | Notes |
|---|---|---|
| San Francisco | 7.5% | Applies to communications services |
| Los Angeles | 9% | UUT (Utility Users Tax) may apply to SaaS bundles |
| San Jose | 5% | VOIP-based software platforms subject |
| Sacramento | 7.5% | Applies to telecom revenue |
| Oakland | 7.5% | Enforced for communication providers |
Conclusion: SaaS ≠ Sales Taxable, But May Trigger Utility Tax
While most California SaaS platforms escape sales tax, those offering communication tools or embedded VOIP/video features should be prepared for local PUT obligations. The classification depends on functionality, billing practices, and customer location.
If your SaaS stack includes AI voice, call automation, or video conferencing, now is the time to:
- Review your structure
- Segment billables
- Avoid retroactive PUT enforcement
Work With a SaaS Tax Expert
Anshul Goyal, CPA EA FCA is a U.S.-licensed CPA and California tax advisor for AI, SaaS, and telecom-integrated startups. He helps clients:
- Navigate local tax classification issues
- Structure multi-entity setups to segment taxable services
- Comply with city-level tax registrations and billing disclosures
Disclaimer
This blog is for general educational purposes only and does not constitute legal or tax advice. Always consult a CPA and local tax expert before making decisions on tax classification. Information is based on 2025 rules and may be subject to change.
FAQs: Public Utility Tax on SaaS in CA
- Does California charge sales tax on SaaS?
No. Most SaaS services are not subject to CA sales tax, but PUT may apply locally. - How do I know if my SaaS is a communications utility?
Check if you offer voice, video, messaging, or telecom-like services, even via API. - Can cities audit SaaS companies for PUT?
Yes. Cities can enforce their Utility Users Tax ordinances on gross receipts. - What if I just pass through VOIP fees?
You may still be liable if you bill the end customer directly. - Can I exclude VOIP revenue from PUT?
Only if it’s handled by a licensed third-party provider and not bundled into your charges.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed CPA, IRS Enrolled Agent, and Fellow Chartered Accountant who specializes in tax strategy for tech startups, SaaS providers, and AI platforms. He helps companies avoid exposure to local California taxes, including UUT and gross receipts-based fees.