Is Software Taxable in North Dakota? North Dakota Sales Tax Rules for COTS and Custom Software
In North Dakota, software taxability depends on whether the software is Commercial Off-the-Shelf (COTS) software or custom software. COTS software is generally treated as tangible personal property and is taxable, while custom software is generally exempt. This article explains North Dakota sales tax rules for computer software transactions.
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North Dakota Software Sales Tax: COTS Software Is Taxable While Custom Software Is Generally Exempt
North Dakota distinguishes between Commercial Off-the-Shelf (COTS) software and custom software.
The key question is:
Is the software developed for general sale or specifically for a particular customer?
COTS Software Is Generally Taxable
Commercial Off-the-Shelf software refers to software that:
- is predeveloped;
- is available for general use;
- is not designed for a specific customer.
Examples include:
- payroll software;
- general ledger software;
- spreadsheet software;
- word processing software;
- data management programs.
North Dakota treats non-custom computer software as:
tangible personal property
Therefore, sales, leases, or transfers of use rights are generally taxable.
Delivery Method Does Not Change Tax Treatment
For non-custom software, taxability generally applies regardless of transfer method.
Examples:
- physical media;
- storage devices;
- other software transfer methods.
If ownership, possession, or use rights are transferred for consideration, the transaction is generally taxable.
Example:
Software license USD 1,000
Customer receives:
- software usage rights;
- access rights;
- software copy.
The transaction is generally taxable.
Custom Software Is Generally Exempt
Custom software is software:
- developed for a specific customer;
- designed to solve customer-specific needs;
- not intended for general sale.
Example:
Custom inventory management system
The development process includes:
- customer consultation;
- customized design;
- specialized development.
Such software is generally exempt from tax.
Types of Computer Software
North Dakota identifies different categories of software.
Operating Programs
Includes:
- operating systems;
- basic operating programs;
- software environments supporting computer operations.
Applied Programs
Includes:
- specialized application software;
- software designed to solve specific problems.
Examples:
- payroll processing;
- general ledger;
- sales data;
- spreadsheet;
- word processing;
- data management programs.
Common North Dakota Software Tax Mistakes
Assuming all software is exempt
Only qualifying custom software receives exemption treatment.
Ignoring COTS vs. custom classification
Standard software:
- generally taxable.
Custom software:
- generally exempt.
Focusing only on delivery method
North Dakota focuses on software classification, not only delivery format.
Failing to separate software and services
Businesses should distinguish:
- software sales;
- software development;
- maintenance;
- consulting.
Compliance Tips for Software Businesses
Businesses selling software in North Dakota should:
- Determine whether software is COTS or custom;
- Maintain development documentation;
- Clearly describe software type in agreements;
- Separate software and service charges;
- Classify revenue correctly.
Conclusion
North Dakota software tax treatment depends primarily on software classification:
- COTS software: Taxable;
- Non-custom software transfers: Generally taxable;
- Custom software: Generally exempt.
The key question is whether the software is a standardized commercial product or a customer-specific development.
Sources
North Dakota Office of State Tax Commissioner — Computer Software Guidelines https://www.tax.nd.gov/sites/www/files/documents/guidelines/business/sales-use/gl-21825-1.pdf