Is SaaS Taxable in North Carolina?

Taxation of digital services is evolving across the United States. States are reviewing how sales and use tax laws apply to modern business models, especially those involving remote software access. Businesses must understand these applications, as tax obligations for digital services differ significantly from traditional goods. This adaptation aims for fairness and revenue in a rapidly digitizing economy.

Understanding Software and Services for Tax Purposes

North Carolina tax law distinguishes between various forms of software and services to determine sales and use tax applicability. Prewritten computer software is defined as software designed for general application, not for a specific user. This category includes programs available to the public and is taxable, whether delivered physically or electronically. N.C. Gen. Stat. § 105-164.3 defines “prewritten computer software” as software not developed to a specific purchaser’s specifications.

Conversely, custom software, developed for a single client’s unique needs, is generally a non-taxable service. The state also defines “certain digital property” under its tax law, encompassing specified digital products and other digital goods transferred electronically. This definition is crucial for understanding how remotely accessed digital content is categorized for tax purposes.

North Carolina’s tax framework traditionally applied sales tax to tangible goods, while many services remained untaxed. However, the state has expanded its tax base to include certain services and digital products. This evolving interpretation means that even without a physical transfer, the right to access or use digital property can trigger tax obligations, providing context for Software as a Service (SaaS) taxation.

Applying North Carolina Sales Tax to SaaS

North Carolina generally applies sales and use tax to Software as a Service (SaaS) offerings, treating them similarly to sales of “prewritten computer software” or “certain digital property.” Even when software is accessed remotely via the internet, the transaction involves the use of prewritten software. The software accessed must be standardized and not custom-developed for the specific subscriber.

The state levies tax on the sales price of “certain digital property,” regardless of permanent use rights or continued payments. N.C. Gen. Stat. § 105-164.4 subjects the sales price of certain digital property to the general sales tax rate. This provision forms the basis for taxing SaaS, as it encompasses the remote delivery of standardized software functionality. Remote access to prewritten software, even without physical download, is a taxable event.

Common characteristics of taxable SaaS in North Carolina include its standardized nature, general availability to multiple users, and lack of significant customization. Examples include subscription-based accounting software, customer relationship management (CRM) platforms, project management tools, and enterprise resource planning (ERP) systems. These applications provide access to pre-existing, non-customized software functionality through a subscription model. The North Carolina Department of Revenue (NCDOR) views providing access to such software as a taxable sale of digital property.

Tax Calculation and Collection Obligations

For taxable Software as a Service (SaaS) transactions in North Carolina, the applicable sales and use tax rate consists of a statewide rate and any local rates. The state sales tax rate is 4.75%. Local sales and use tax rates, ranging from 0% to 2.75%, apply based on the sourcing jurisdiction, resulting in a combined rate up to 7.5%.

The tax applies to the full subscription fee for SaaS, including any mandatory charges. This “sales price” forms the tax base. For SaaS, this includes the entire recurring charge and any associated one-time setup fees or other charges required for software access.

The primary responsibility for collecting and remitting sales tax falls on the vendor, the SaaS provider. If the SaaS provider has economic nexus in North Carolina, they must collect sales tax from customers at the time of transaction. Economic nexus is established when a remote seller’s gross sales sourced to North Carolina exceed $100,000 in the previous or current calendar year, as outlined in N.C. Gen. Stat. § 105-164.8.

For North Carolina businesses or individuals purchasing SaaS from a vendor who does not collect sales tax, a use tax obligation arises. The use tax is a complementary tax, ensuring that goods and services consumed within the state, for which sales tax was not collected by the seller, are still taxed. Purchasers are responsible for self-assessing and remitting this use tax directly to the NCDOR. Out-of-state SaaS providers meeting economic nexus thresholds must register with the NCDOR to fulfill their collection and remittance duties.

Specific Exemptions and Considerations

While Software as a Service (SaaS) is generally taxable in North Carolina, a notable exception exists for highly customized software development services. If the SaaS offering primarily involves creating unique, bespoke software tailored to a client’s requirements, and this customization constitutes a significant portion of the transaction’s value, it may be treated as a non-taxable service rather than a taxable sale of prewritten software.

Certain purchasers are exempt from sales tax. These include governmental entities (federal, state, and local agencies) and specific non-profit organizations with valid exemption certificates. Purchases for resale, where the buyer intends to re-sell the software or service without using it, can also be exempt. N.C. Gen. Stat. § 105-164.13 details various applicable exemptions.

Transactions bundling taxable SaaS with non-taxable services require consideration. When a single price is charged for a bundled transaction with both taxable and non-taxable components, taxability depends on the “true object” or how components are presented. If the primary component is taxable SaaS, the entire bundled price may be subject to sales tax. Clear invoicing that separately states prices of taxable and non-taxable elements helps apply tax correctly.