In the wake of the Wayfair decision, there are a lot of questions surrounding sales taxes across the many U.S. states. While many queries we receive revolve around establishing physical presence and nexus for retail items, the next important question a company must always ask is, “If I have nexus, is my product taxable?” In that regard, there are a few areas many business often overlook: Software-as-a-Service (SaaS), cloud computing and electronically downloaded software. Are these items taxable? It depends.

A few months ago we explored the taxability of SaaS, cloud computing and electronically downloaded software in 15 states across the country; today we’re taking a look at the tax ramifications of three more states: North Dakota, South Dakota and Nebraska.

Nexus & Constitutional Issues for Middle America Companies

Following the Wayfair decision, do companies in North Dakota, South Dakota and Nebraska need to pay online sales tax to states in which they’ve established nexus? And if so, what is the tax threshold?

North Dakota: Yes

Companies with $100,000 in sales or 200 separate transactions within the state during the calendar year are responsible for North Dakota’s sales taxes. They are responsible for collecting and remitting sales tax by either October 1 of this year or 60 days after meeting the threshold – whichever comes later.

South Dakota: Yes (pending litigation)

It’s probably no surprise that companies are responsible for online sales tax in South Dakota; it was the state involved in the Wayfair case. Although the Supreme Court overturned Quill in favor of South Dakota, and the state already established a threshold of $100,000 in sales or 200 separate transactions within the state, South Dakota’s Supreme Court remanded the case to the state’s Sixth Judicial Circuit for further proceedings consistent with the United States Supreme Court’s opinion. For now, an injunction barring the state from enforcing the provision remains in place, but the state will begin administering its law soon – probably before year end.

Nebraska: Yes

While this state hasn’t technically enacted economic nexus for out of state sales, the state’s Department of Revenue has stated it will start to enforce online sales tax collection requirements that are consistent with the Wayfair decision beginning January 1, 2019. While the state hasn’t announced an official economic threshold, the Department of Revenue does plan to create an exception that benefits smaller businesses, much like South Dakota and North Dakota’s exemptions. We expect to hear more from Nebraska soon as January 2019 is approaching quickly.

SaaS and Cloud Computing Rules in 3 Middle States

Even with economic nexus established, what does that have to do with SaaS and cloud computing? Here’s how each state approaches the tax ramifications of these areas.

North Dakota: No Guidance

This state has no official regulations or statues regarding how sales and use tax applies to cloud computing or SaaS. However, North Dakota imposes sales and use tax on the sale, lease or rental of canned (prewritten) computer software regardless of the method in which it is delivered, be it in tangible form, electronically delivered, or by load and leave. As such, that may be an indication of taxability of SaaS as well.

South Dakota: Taxable

While this state hasn’t directly addressed the taxability of SaaS, it does impose sales and use taxes on all computer software and services. According to the tax code, the services are sourced to the location where the service is provided. South Dakota also imposes sales taxes on fees paid to access a database or network as well as software, programs or computer systems in the cloud.

Nebraska: Nontaxable

This state has not specifically addressed the taxability of cloud computing, although it has released a guide that explains sales for cloud computing and SaaS services are not taxable, no matter where the hardware, software or other network components are located. It is worth noting, however, that the service provider needs to pay sales or use tax on its purchaser of software, hardware and network components if they’re used in-state.

Electronically Delivered Software Treatment in 3 Middle States

Note: For purposes of this blog article, we address the taxability of pre-written or canned software (not custom software), which is delivered electronically. Custom software is exempt in most states, regardless of the method of delivery.

North Dakota: Taxable

Although North Dakota doesn’t provide any guidance regarding the taxability of SaaS and cloud computing, it does state that prewritten software that’s sold, leased or rented – even when delivered electronically – is subject to sales and use tax. The state also defines electronic delivery as, “Delivered from the seller to the purchaser by means other than tangible storage media.”

South Dakota: Taxable

Much like the cloud computing and SaaS tax ramifications, prewritten software that’s electronically delivered is taxable in South Dakota.

Nebraska: Taxable

Although SaaS and cloud computing services are not taxable in Nebraska, prewritten software that’s electronically delivered to the purchaser is subject to sales and use tax in the state.

Have a tax question? Contact Monika Miles.