South Dakota

Understanding Sales Tax for SaaS in South Dakota

Is SaaS Taxable in South Dakota?

Yes. In South Dakota, SaaS is generally considered taxable at a rate of 4.5%, and subject to the state’s sales and use tax. South Dakota treats SaaS as a form of tangible personal property, even though it is delivered electronically, which is why it is subject to tax under the state’s sales tax laws.

B2B Sales: SaaS products sold to businesses are taxable in South Dakota. If a company purchases SaaS for use in its operations or commercial activities, sales tax must be collected on the transaction.
B2C Sales: When SaaS is sold to individual consumers, it is also typically subject to sales tax in South Dakota, especially if the service is used for business purposes or falls under a taxable category.

The state’s clear stance on SaaS taxation means that businesses must be vigilant in ensuring they are properly classifying and taxing their digital products when selling to customers in South Dakota.

Determining SaaS Taxability

To determine if your SaaS product is taxable in South Dakota, businesses should consider the following:

Assess the Product’s Functionality: If the SaaS product provides substantial business functionality, such as accounting software, customer relationship management (CRM) tools, or project management solutions, it will likely be taxable. South Dakota primarily taxes SaaS that is used for business or commercial purposes.
Check for Exemptions: While SaaS is generally taxable, certain types of digital products may be exempt, especially if they are for personal or educational use. SaaS products bundled with other services or used by exempt entities, such as government agencies or nonprofits, may also qualify for exemptions.
Stay Informed About Legislative Changes: Sales tax laws in South Dakota can evolve, and businesses should monitor changes in legislation or state guidance to stay in compliance. It’s essential to periodically review updates to ensure accurate taxability of digital products.

Nexus Thresholds for South Dakota

South Dakota has specific nexus rules that determine whether a business is required to collect sales tax on SaaS transactions. These rules include both physical and economic nexus guidelines:

Physical Nexus: If your business has a physical presence in South Dakota, such as an office, employees, or property within the state, you are required to collect sales tax on taxable SaaS products.
Economic Nexus: South Dakota has an economic nexus threshold, which means that businesses that have $100,000 in gross sales in the state within a 12-month period must collect and remit sales tax, even if they do not have a physical presence in the state. There is no transaction threshold.

This economic nexus rule allows South Dakota to collect sales tax from out-of-state businesses making substantial sales into the state, which is particularly relevant for SaaS providers selling to South Dakota customers.

Sales Tax Compliance Checklist

For businesses with taxable SaaS products and nexus in South Dakota, the following steps are necessary to ensure compliance with state sales tax laws:

Register for a Sales Tax Permit: Any business with nexus in South Dakota must register with the South Dakota Department of Revenue to obtain a sales tax permit. This allows the business to legally collect sales tax on taxable transactions.
Collect Sales Tax: Once a business has a sales tax permit, it is required to collect the appropriate amount of sales tax on all taxable SaaS transactions. South Dakota has a base sales tax rate of 4.5%, but businesses should also be aware of local tax rates, as some cities or counties may impose additional taxes.
File Sales Tax Returns: Businesses must file periodic sales tax returns with the South Dakota Department of Revenue, reporting total sales, taxable sales, and the sales tax collected during the reporting period. The frequency of filing (monthly, quarterly, or annually) depends on the volume of sales.
Remit Collected Sales Tax: Along with filing the sales tax return, businesses must remit the collected sales tax to the state. Failure to remit the tax on time could lead to penalties and interest charges.

By following these steps, businesses can ensure they remain in compliance with South Dakota’s sales tax laws for SaaS.

Examples of Taxable vs. Non-Taxable SaaS in South Dakota

Here are some examples of SaaS products and scenarios that may help clarify the taxability in South Dakota:

Taxable SaaS Products:
- Business management software such as accounting and invoicing platforms.
- Customer relationship management (CRM) systems sold to businesses.
- Enterprise-level project management tools used by companies to manage workflows.
- SaaS products intended exclusively for personal entertainment, like streaming services.
- SaaS products used for non-commercial purposes.
Non-Taxable SaaS Products:
- Educational software purchased by a qualified educational institution for instructional use.

Local Tax Considerations in South Dakota

South Dakota’s state sales tax rate is 4.5%, and local jurisdictions may impose additional sales taxes on SaaS products which may increase tax to 6.11%. However, it’s important for businesses to stay aware of any changes in local tax rates or special provisions that might apply to specific industries or types of services.

Penalties for Non-Compliance in South Dakota

Failure to comply with South Dakota’s sales tax laws can result in significant penalties:

Late Filing Penalties: Businesses that fail to file their sales tax returns on time may incur penalties based on the amount of tax owed.
Interest on Unpaid Taxes: In addition to penalties, interest will accrue on any unpaid sales tax, making it important to remit the tax promptly.
Audit and Back Taxes: If a business is audited and found to be non-compliant with the state’s tax laws, they may be required to pay back taxes, along with interest and penalties.

To avoid these consequences, businesses should ensure timely filing, accurate reporting, and proper tax collection on taxable SaaS transactions.

Additional Resources

For more detailed information on South Dakota’s sales tax laws for SaaS and digital products, businesses should visit the official South Dakota Department of Revenue website: