The state’s sales tax rate is 5%. As in many states, a deciding factor for taxability in North Dakota is whether something is tangible personal property. Prewritten software is considered tangible property, while SaaS is generally considered a service (and is therefore not taxable in North Dakota).
Taxes levied by local jurisdictions in North Dakota (counties and municipalities) can add as much as an additional 3% and increase the tax rate to 8%. Companies that have established physical or economic nexus in the state are obligated to collect sales tax on taxable sales (more on nexus later in this article).
This article provides a concise overview of sales tax regulations in North Dakota, specifically focusing on SaaS and digital goods. Understanding these rules is crucial for businesses providing these services, so they can ensure compliance and avoid penalties.
While North Dakota does not tax most SaaS transactions, tax laws change frequently. The rise of the digital economy has prompted many states to reevaluate their tax policies so they can capture revenue from this growing sector. One way to do this is to start taxing digital goods and services like SaaS. So businesses offering SaaS in North Dakota should stay informed about tax laws and regulations and potential changes to them.
North Dakota’s perspective
As mentioned above, North Dakota taxes tangible goods but doesn’t tax services, and SaaS is considered a service. Time-sharing and data processing are also considered services. While no specific regulations address SaaS, the North Dakota Office of State Tax Commissioner deems it nontaxable in its guidelines.
There are exceptions to consider:
- Bundling the SaaS offering with a tangible product like a physical storage device could subject the entire sale to tax.
- If the maintenance contract is not optional for the purchaser, the sale may be taxable.
- Sales of statistical reports, graphs, diagrams, and so on, produced or compiled by a computer and sold or reproduced in their original form, are taxable.
While there are no publicly discussed plans to tax SaaS in North Dakota in the immediate future, this could change. States are increasingly looking to adapt their tax systems to capture revenue from digital goods and services, this includes Louisiana, which is the latest state to begin taxing these transactions.
Several factors are behind this shift:
- Economic changes: The rise of the internet, mobile devices, and cloud computing has led to a significant shift toward digital products and services. This has created a need for states to re-evaluate their tax policies.
- Budgetary pressures: States often face budget shortfalls, and expanding the tax base to include digital goods and services like SaaS can be seen as a way to generate additional revenue. This conversation is happening in states like Virginia; however, North Dakota currently has a strong financial position, but the situation could change as the state looks to expand services.
- Increased scrutiny: The South Dakota v. Wayfair Supreme Court ruling has made it easier for states to tax remote sellers, including those offering digital products and services such as SaaS.
It’s important to stay informed, and you may want to consider hiring a professional to help you navigate sales tax rules and regulations.
What about digital goods?
No tax applies to these digital goods, regardless of whether the purchaser has the right to use them permanently or to use them without making continued payments:
- Digital audio work (music)
- Digital audiovisual work (video)
- Digital books
- Magazines, newspapers, newsletters, and other publications;
- Ringtones
Understanding compliance
Many states do tax SaaS. Consider North Dakota’s neighbor, South Dakota. That state taxes SaaS at 4.2%; New York, at 4%; Pennsylvania, at 6%; and Ohio, at 5.75%. These are just a few examples. Compliance begins with knowing your nexus status in the states where you do business.
There are two types of nexus: physical and economic. A business has physical nexus in North Dakota if it meets at least one of these criteria:
- It has an office, warehouse, store, or other place of business in the state.
- It has employees in the state.
- It stores inventory in the state.
- It conducts regular and systematic solicitation of sales in the state.
A business has economic nexus in North Dakota if its annual sales exceed $100,000 in the state in the current or previous calendar year. In 2018, North Dakota removed its 200 transaction threshold.
While physical and economic nexus are the most important and pertinent to North Dakota, there are other types of nexus to consider:
- Affiliate nexus: A relationship with a separate entity to promote or facilitate sales.
- Click-through nexus: A relationship with an entity that refers customers through a website link.
- Marketplace nexus: Selling through a third-party facilitator such as Amazon or eBay.
The rules are complex and subject to change. Consider the services of a sales tax compliance platform, such as Numeral, to ensure complete compliance with sales tax laws wherever you do business, and to stay abreast of future changes.
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Staying compliant nationwide
Whether or not a given state taxes SaaS, all businesses must first ensure their accounting or sales system captures all information on each sale to remit the required information to the appropriate tax authorities These factors include:
- Customer information: Name, billing address, shipping address, and tax status.
- Transaction details: Date/time of sale, unique invoice number, product/service sold, number of items, unit price, and total sale.
- Tax collected, if any: Calculation and recording of sales or use tax at applicable state and local rates.
- Reporting: The ability to report captured information customized to prepare applicable reports and filings.
In a state that does tax SaaS, becoming and remaining compliant would mean:
- Registering your business with the appropriate taxing authorities per state rules,
- Collecting the correct amount of sales tax from each customer.
- Filing reports to the correct taxing authorities based on the timelines and due dates they establish.
- Remitting the collected taxes in full in the manner prescribed.
Additional Resources
The following are a few links to help you find additional information on the topics covered in this article:
- Office of the State Tax Commissioner
- Sales and Use Tax Page
- Sales and Use Tax Requirements
- Tax Form Search Page
- Sales Tax - Computers - Guidelines
- Apply for a Sales Tax Account
- Local Tax Rates
- Contact Us
Also, consider researching webinars, seminars, and video training to educate yourself on North Dakota's compliance requirements.
The bottom line
Here are a few key takeaways.
North Dakota currently does not tax SaaS but does tax prewritten software. The state sales tax rate is 5%.
Additional county/municipal sales taxes can raise the total to 8%. The digital economy is expanding rapidly. About half of all states tax SaaS in some capacity, and more may consider adding it to their tax base.
Ensure that you keep adequate, accurate sales records to comply with the applicable laws in each jurisdiction where you have nexus. Be aware of and stay abreast of compliance changes.
