No. North Carolina does not tax software as a service (SaaS), but the state does tax some digital goods. The state applies a tax of 4.75% to sales of items that it defines as tangible personal property. SaaS is considered a service in North Carolina and, therefore, is not taxable.
Taxes levied by local jurisdictions (such as counties and cities) bring the average combined tax rate to 7% (rates vary across the state). Your business is responsible for collecting sales tax on each taxable sale and remitting the amount to the appropriate tax authority if it has nexus in the state (more on nexus later in this article).
This article examines how North Carolina’s sales tax rules and regulations apply to SaaS and digital goods. If you sell products or services in North Carolina, you should be fully aware of its rules and regulations. Keep in mind that tax laws change frequently. For example, in July 2024, North Carolina eliminated one of the thresholds a remote seller had to surpass to establish nexus in the state.
And although SaaS is currently not taxable in North Carolina, many digital products are currently subject to sales tax.
SaaS taxation rules in North Carolina
North Carolina taxes tangible goods, and SaaS is considered a service. While no specific regulations address SaaS, The North Carolina Department of Revenue (NCDOR) has deemed SaaS not taxable in its guidance and private letter rulings.
North Carolina defines SaaS by these criteria:
- It must be cloud-based: The software is hosted on the provider’s servers and accessed by users over the internet.
- It must use a subscription model: Users pay a subscription (annual or monthly, for example) or a recurring fee to use the software.
- It does not involve downloading or installation: Users don’t download or install the software on their own devices; they access it through a web browser.
- The provider maintains control: The SaaS provider is fully responsible for maintaining the software, servers, and infrastructure.
Bear in mind a couple of important considerations:
If the SaaS offering is bundled with a tangible product, the entire transaction may be taxable. Examples include providing hardware along with the software and transferring ownership of prewritten software.
If the SaaS provides access to a database that would otherwise be taxable if delivered in a tangible format, the entire transaction may be taxable.
Some specific digital goods are taxable whether the purchaser has the right to use the product permanently or to use it without making continued payments, including:
- Digital audio work (music).
- Digital audiovisual work (video).
- Digital books.
- Magazines, newspapers, newsletters, and other publications.
- Photographs.
- Greeting cards.
What you need to know about compliance
Currently, about half of U.S. states tax SaaS, including nearby South Carolina. In addition, at least five states, including Wisconsin, Hawaii, New Mexico, Washington, and Pennsylvania, have expanded their taxable bases to include SaaS and/or other digital products in the last five years.
So monitoring tax regulations in North Carolina and all fifty states is essential. The place to start is determining whether you have nexus in a state. There are two kinds of nexus: physical and economic.
A business has physical nexus in North Carolina if it:
- Has an office, warehouse, store, or other place of business in the state.
- Has employees in the state.
- Stores inventory in the state.
- Makes deliveries in the state.
- Installs or repairs tangible personal property in the state.
- Owns or leases real property in the state.
- Has an affiliate that refers customers in the state.
A business has economic nexus in the state if its annual sales there exceed $100,000 in the previous or current year. Many states also consider nexus to be established if a business has a certain number of sales in the state in a calendar year. But as mentioned above, in July 2024, North Carolina removed the 200 separate transaction threshold.
Tax rules are complex and are subject to change. Consider the services of a sales tax compliance tool such as Numeral to ensure complete compliance with tax laws and to stay abreast of future changes.
[blog-post-inline-cta]
Staying compliant nationwide
Whether or not a given state taxes SaaS, all businesses must ensure that all applicable information concerning its sales is captured, coded, reported, and maintained to allow for any current or future compliance changes.
In a state that does tax SaaS, you would follow these steps:
- Register your business with the appropriate taxing authorities per state rules.
- Collect the correct amount of sales tax from each customer.
- File reports to the correct taxing authorities based on the timelines and due dates they establish.
- Remit the collected taxes in full in the manner prescribed.
Additional Resources
North Carolina provides many resources to help instruct and educate on sales tax issues, including:
- North Carolina Department of Revenue (NCDOR) Homepage;
- NCDOR Taxable Items;
- NCDOR Sales and Use Tax;
- NCDOR Certain Digital Property;
- NC Sales Tax by County.
NCDOR General Information Line: 877-252-3052
Additional information, including seminars, webinars, and a tax library, is available at NCDOR Customer Education.
The bottom line
North Carolina currently does not tax SaaS, but the state does tax certain digital goods.
The state sales tax rate is 4.75%, and jurisdictions within the state may apply their own tax. It’s important to keep in mind that sales tax laws change frequently, so consider a tax compliance solution to keep your systems up to date and in compliance.
