Yes. In South Dakota, software as a service (SaaS) is taxable. The state imposes a 4.2% base sales tax rate, with some local jurisdictions applying their own, additional, sales tax.
Your tax responsibilities depend on whether your business has nexus in South Dakota. There are two types of nexus: physical and economic.
You have physical nexus if you have an office, employees, inventory, or any other physical presence in the state. You establish economic nexus when your business exceeds $100,000 in sales to South Dakota customers in a year — no matter where they are, sellers can be required to collect and remit sales tax if they meet these thresholds. Misunderstanding these rules can lead to penalties and other additional costs.
What does taxability mean for SaaS?
SaaS is software that is accessed through the internet, unlike traditional software that a user downloads onto their own device. SaaS is usually offered through a subscription model, and this hybrid nature (software and service) makes it tricky to classify for tax purposes.
SaaS differs from other digital goods and traditional software products in significant ways. For example, buying a digital song or e-book is considered a purchase of a product, while subscribing to a SaaS product provides access to software hosted on external servers. These distinctions might seem minor, but they play a big role in determining how a state chooses to tax them.
Tax rules for SaaS vary widely across the United States; some states classify SaaS as a service and tax it accordingly. Others see it as software licensing or even a tangible product, and therefore apply different tax rules.
SaaS taxation rules in South Dakota
South Dakota treats SaaS as a taxable service, classifying it under the state’s retail sales tax laws, meaning that businesses selling SaaS in the state must collect and remit sales tax on transactions, including business-to-business (B2B) transactions.
Unlike some states that exclude certain types of SaaS sales, for example, Georgia or Michigan, South Dakota applies its tax rules broadly to all SaaS products, emphasizing accessibility and usage over ownership.
South Dakota has been taxing SaaS and digital goods for several years, with consistent policies that reflect the state’s broader approach to modern, tech-driven transactions. The state was one of the first to embrace these policies, recognizing SaaS as an increasingly significant component of business and consumer spending.
Exceptions and exemptions
While the taxation rules apply broadly, some exceptions apply. For example, nonprofit organizations or educational institutions may qualify for exemptions, depending on the circumstances.
However, these exemptions are not automatic and require businesses to carefully review state regulations or consult with tax professionals.
What about digital goods?
In addition to SaaS, South Dakota taxes a wide variety of digital goods that are sold within the Mount Rushmore State. E-books, streaming services, and online courses all fall under taxable categories if accessed or consumed within the state.
The state’s broad approach to taxation of these types of goods ensures that most digitally delivered products and services are subject to the same tax treatment as physical goods.
Example: How local tax rates may apply
To highlight what’s being discussed, imagine you run a startup selling SaaS subscriptions and sell a $1,000 annual subscription to a customer based in Sturgis, South Dakota.
In South Dakota, the statewide base sales tax rate is 4.2%, but local taxes can add up to an additional 2%. In areas like Sturgis, for example, this local tax means your customer would owe a combined sales tax rate of 6.2%.
Here’s how this would work in practice: The $1,000 subscription is subject to the state’s 4.2% tax, totaling $42, then the Sturgis local tax rate of 2% adds another $20. So the total sales tax collected from your customer would be $62. As the seller, you would collect this amount at the time of sale and remit it to the state.
The customer’s point of use plays a big role in determining which taxes apply. In this case, Sturgis applies local taxes because the customer resides there and uses your software in that location. If your customer’s business operated in a different city or county that doesn’t impose any additional local tax, the total tax would be the basic 4.2% statewide rate.
For SaaS businesses, tracking the customer’s location is an essential part of staying on top of your company’s tax obligations. South Dakota applies sales tax based on where the service is consumed, meaning that your compliance responsibilities vary depending on where your customers are located.
Navigating compliance for SaaS companies
Selling SaaS in South Dakota means taking specific steps to comply with the state’s tax laws. Here’s a step-by-step guide to help you stay on track:
- Register for a sales tax permit: Before collecting any taxes, you need to register for a South Dakota sales tax permit, which involves submitting an application through the South Dakota Department of Revenue website. Once you’re approved, you’ll receive a tax permit that allows your business to collect and remit sales tax legally.
- Collect taxes on sales: Once registered, you’ll need to collect the appropriate sales tax for every taxable transaction; in South Dakota, SaaS is taxable at the state’s base rate of 4.2%, plus any applicable local taxes. To calculate your owed taxes correctly, track where your customers use your service, as location-specific rules determine the total tax rate.
- File tax returns: South Dakota requires businesses to file sales tax returns regularly, depending on their sales volume. Returns can be filed online monthly, quarterly, or annually, and each return should include total sales, taxable sales, and the amount of tax collected during the reporting period.
- Remit collected taxes: After filing your return, you must remit and pay the sales tax you collected to the state, which you can easily do online using your EPath account. Failing to remit taxes on time can result in penalties and interest charges.
If your business has been selling SaaS in South Dakota without collecting or remitting sales tax, options like Voluntary Disclosure Agreements or VDAs can help. A VDA allows you to report and pay back taxes while potentially reducing penalties, which is particularly useful for businesses that only recently became aware of their tax obligations.
If your business no longer meets the nexus thresholds (for example, $100,000 in sales or physical presence), you may be eligible to cancel your sales tax permit with the state. The process involves notifying the state and stopping tax collection for all of your South Dakota transactions, which you can easily do online using the state’s online Filing and Tax Payment Portal.
Managing tax compliance across multiple jurisdictions can be challenging, especially when local tax rates and rules vary. Thankfully, Numeral offers a practical solution that allows you to automate your organization’s tax calculations, tracking, and reporting needs.
It’s been designed from the ground up to simplify compliance for SaaS companies, helping you avoid manual errors and stay compliant across all of your sales channels.
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Additional resources for staying compliant
Keeping up with South Dakota’s tax regulations can feel like a lot, but there are plenty of resources available to help you. The South Dakota Department of Revenue website is a great place to start.
- Filing and Paying Taxes Online Help
- South Dakota Sales and Use Tax PDF
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If you’re looking for more personalized guidance, local tax consultants in South Dakota and tax agencies can be a valuable resource.
They can help you navigate complex scenarios, such as managing back taxes or determining nexus obligations, and many consultants also specialize in SaaS businesses, making them particularly helpful for unique challenges in this field.
Maintaining SaaS tax compliance in South Dakota
SaaS taxability in South Dakota requires attention and diligence, but understanding the different rules that apply can simplify your path to compliance. To stay compliant, make sure to follow key steps like registering for a sales tax permit, accurately collecting taxes, filing returns, and remitting payments on time.
If the complexity of compliance starts to feel overwhelming, tools like Numeral can streamline tax management, leaving you free to focus on growing your business. To receive personalized guidance, try a free tax analysis or schedule a demo today and see how Numeral can enhance compliance within your company.
