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