The statewide base sales tax rate in Minnesota is 6.88%. Local municipalities in Minnesota may apply their own, additional sales tax; the average combined rate, including these local taxes, is 8.04%.
Businesses that have nexus in Minnesota must collect and remit sales tax on sales of taxable items. “Nexus” is a physical or economic connection to a state — such as an office or $100,000 in annual sales there (more on nexus later in this article).
Understanding when sales tax is required on SaaS sales is important for businesses — particularly those operating in multiple states — as misclassifying a product or failing to meet obligations could lead to penalties or fines.
Taxation rules in Minnesota
In Minnesota, SaaS products, including remotely accessible or online-hosted solutions, are not subject to sales tax.
SaaS is typically defined as software accessed via the internet, hosted on remote servers, and licensed for use rather than owned outright.
What about other types of software?
Other types of software, however, are treated differently under Minnesota tax laws. According to Minnesota Statute 297A.61, subdivision 3(f), prewritten, or canned, software is taxable regardless of how it is delivered — electronically, via download, or on physical media.
On the other hand, custom software created for specific customer needs is exempt from sales tax. This distinction is important for businesses offering multiple software solutions or transitioning between product types.
What about digital goods?
Although SaaS is not taxed, certain digital goods are classified as taxable digital products. This includes content such as music downloads, e-books, and online video games. These are distinct from SaaS because they often involve a purchase or ownership transfer rather than a temporary license.
Access to digital news articles or charts is nontaxable in Minnesota.
The future of SaaS taxability in Minnesota
There has been little discussion about imposing taxes on SaaS in Minnesota. However, the growing reliance on SaaS and cloud-based services may influence future tax policies.
With this in mind, businesses should also consider how Minnesota’s approach compares with that of other states, some of which have broader definitions of taxable digital products.
You might still want to think about compliance
While Minnesota exempts SaaS from sales tax, many other states do tax SaaS.
Across the U.S., the taxation of SaaS and digital services is becoming more common as states seek to expand their tax bases. For example, the Joint Subcommittee on Tax Policy had this exact discussion at the end of 2024 in Virginia.
And Minnesota’s neighbors, South Dakota and Iowa, both impose sales tax on SaaS. Businesses with customers in multiple states need to stay informed about varying regulations.
And as more jurisdictions adopt rules that include digital goods and cloud-based services, failing to track changes to sales tax regulations can lead to unexpected tax liabilities.
Understanding nexus
Nexus thresholds determine when a business has a tax obligation in a state. For SaaS companies, nexus can be established by a physical presence or by economic activity.
- In Minnesota, physical nexus is established if a business has a warehouse, an office, or employees in the state.
- Economic nexus is established when a company exceeds $100,000 in sales or completes 200 transactions with Minnesota customers in a calendar year. After the South Dakota v. Wayfair ruling, this standard applies even if the business has no physical presence in the state.
Other states have their own nexus rules, complicating compliance efforts for growing businesses. Recognizing where and how nexus applies to a transaction can help companies avoid penalties and remain compliant as they expand their operations.
Staying compliant nationwide
Businesses offering SaaS and other digital goods must pay close attention to sales tax obligations in the states where they do business. Properly calculating, collecting, and remitting taxes is key to preventing fines, interest penalties, and potential audits.
With each state establishing its own regulations, maintaining compliance can be a challenge for businesses with nationwide operations.
General steps for compliance in Minnesota
Businesses that sell taxable digital goods or services in Minnesota must follow specific steps to remain compliant with the state’s sales tax laws. While SaaS products are not taxable in Minnesota, these steps are relevant for companies selling other taxable digital goods:
- Register: Businesses must first register with the Minnesota Department of Revenue to obtain a sales tax permit. This is required before collecting any sales tax. Registration can be completed online through the Minnesota e-Services Portal.
- Collect: After obtaining a permit, businesses must collect sales tax on all taxable transactions. In Minnesota, the statewide base rate is 6.88%. Local taxes may increase the total rate. The Department of Revenue provides a Sales Tax Rate Calculator to help businesses determine the correct rate based on the location of the transaction.
- File: Businesses are required to file sales tax returns on a regular basis. Most businesses in Minnesota file monthly, although smaller companies may qualify to file quarterly or annually. Filing is done through the Minnesota e-Services Portal, where businesses report taxable sales and the tax collected during the reporting period.
- Remit: Along with filing returns, businesses must remit the collected sales tax to the state. Payments can be made electronically through the same e-Services Portal.
Managing these steps can be particularly difficult for companies that are operating in multiple jurisdictions. SaaS providers often benefit from using automated tools, such as Numeral, that simplify the process, saving time and reducing the risk of errors.
Numeral is a streamlined solution for managing tax compliance. It helps companies of all sizes by automating key tasks like tracking nexus, calculating tax rates, and filing returns — all while adapting to the specific rules of each state.
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Additional resources for staying compliant
Minnesota government resources
The Minnesota Department of Revenue offers a variety of tools to assist businesses with sales tax compliance. These resources provide detailed information on tax laws, filing procedures, and additional educational opportunities:
- Sales and Use Tax Information: This resource provides complete details on sales and use tax regulations in Minnesota.
- Sales Tax Education: Access to webinars and courses designed to help businesses understand sales tax obligations.
- Introduction to Sales and Use Tax Course: A foundational course covering the basics of sales and use taxes in Minnesota.
- Sales Tax Fact Sheets and Industry Guides: Detailed documents providing tax information that is tailored to specific industries and situations.
- Minnesota Sales and Use Tax Business Guide: An essential guide offering important sales and use tax information for businesses.
External educational resources
In addition to state-provided materials, several organizations offer educational content to help businesses navigate sales tax compliance in Minnesota. These resources include articles, webinars, and professional advice:
- Managing Sales Tax Compliance
- Tracking Sales Tax Due Dates
- Understanding Voluntary Disclosure Agreements
Final thoughts
SaaS remains exempt from sales tax in Minnesota, but businesses selling multiple digital products should remember that certain digital goods, such as music and e-books, are taxable in the state. Compliance can become challenging for businesses operating in multiple states, as many do tax SaaS.
Staying informed about Minnesota’s tax laws and regularly checking for updates can help businesses avoid complications. For companies seeking a more efficient way to handle tax compliance across various states, using tools like Numeral can simplify your reporting processes, reduce potential compliance risks, and save valuable time for your organization.
