If you’re trying to understand the world of Software as a Service (SaaS) in South Dakota, understanding the state’s sales tax regulations is essential for both businesses and consumers. With the growing reliance on cloud-based solutions, it’s important to know how South Dakota treats SaaS transactions when it comes to sales tax.
In this blog, we’ll explore the key factors determining whether SaaS is taxable in South Dakota, who is responsible for paying the tax, and how businesses can ensure compliance. Let’s break down the question, “Is SaaS taxable in South Dakota?” and provide clarity on SaaS sales tax in the Mount Rushmore State.
2025 SaaS Sales Tax Rates for South Dakota
In South Dakota, sales tax rates for SaaS are as follows:
- State Sales Tax Rate: 4.2%
- Local Sales Tax Rates: 0%–3%
- Local jurisdictions in South Dakota can impose additional sales taxes, which can bring the total rate for some areas to as high as 7.2%.
- For example, the city of Sioux Falls has a combined state and local tax rate of 6.5%, while Rapid City has a combined rate of 6.0%.
- Local tax rates vary by city and county, so it’s essential to confirm the local rate when determining the appropriate tax to collect on SaaS sales.
Is SaaS Taxable in South Dakota?
Yes, SaaS is taxable in South Dakota. The state taxes Software as a Service (SaaS) because it is considered a form of electronically delivered software or a taxable service.
As of 2025, SaaS is subject to sales tax in the state, whether it is subscription-based or provided on a recurring fee structure.
This includes any online software applications or cloud-based services provided to customers for a fee, such as accounting software, customer relationship management (CRM) tools, and data storage services.
Recent Legislative Changes: South Dakota has clarified that SaaS is subject to sales tax under the state’s broader definition of taxable services. Additionally, the state’s economic nexus laws mean that businesses selling SaaS to South Dakota residents must still collect sales tax if they meet certain sales or transaction thresholds.
How Does South Dakota Define SaaS and Digital Products?
- SaaS (Software as a Service): In South Dakota, SaaS is classified as a taxable service. The state treats SaaS as prewritten software delivered electronically, and the charge for access to such software is subject to sales tax. If your business provides software on a subscription or pay-per-use basis, you are required to charge and remit sales tax on those transactions.
- Digital Products: Digital products, including eBooks, digital music, and other downloadable content, are generally exempt from sales tax in South Dakota. However, there are exceptions. If these digital goods are part of a broader taxable service, such as streaming services, they may be subject to sales tax.
Sales Tax on Software in South Dakota
The state treats SaaS as a taxable service, considering it a form of tangible personal property. Here is a detailed look:
| Software Type | Taxable? | Notes |
| Prewritten (Canned) Software | Yes | Subject to sales tax when delivered electronically. |
| Custom Software | No | Not subject to sales tax if delivered electronically. |
| SaaS (Subscription-Based) | Yes | Subject to sales tax as prewritten software delivered electronically. |
| Digital Goods (eBooks, Music) | No | Generally exempt unless classified as streaming services. |
How to Determine if Your Product is Taxable in South Dakota?
To determine South Dakota SaaS software taxability, consider the following key factors:
- Delivery Method: SaaS is delivered electronically via the internet or cloud-based platforms, which makes it taxable in South Dakota. South Dakota considers electronically delivered software, including SaaS, to be a taxable service.
- Licensing Model: SaaS offerings typically operate under a subscription-based licensing model, where users pay recurring fees for access to the software. T
- Customization: Custom software that is developed for a specific client and is not available for use by others is not taxable in South Dakota. If your SaaS product is fully customizable and developed specifically for a client, it may be exempt from sales tax.
- Bundled Services: If your SaaS is sold as part of a bundle with other services, the taxability depends on whether the bundled services can be separated. If the primary purpose of the bundle is the provision of taxable software, the entire bundle will likely be subject to sales tax.
Are Digital Goods Taxable in South Dakota?
In South Dakota, digital goods like eBooks, digital music, and downloadable videos are generally exempt from sales tax. This exemption applies to digital products that are not associated with a taxable service. However, if digital products are provided as part of a taxable service, such as video streaming or online music streaming, they may become taxable.
For SaaS businesses, it is important to distinguish between digital goods and services like streaming or software access. While digital goods such as eBooks and digital audio files are typically exempt, businesses offering streaming services or digital services that include software access must assess whether those services are taxable. If your SaaS offering includes streaming or other taxable services bundled with digital goods, you may need to collect sales tax on the entire bundle.
Sales Tax Exemptions in South Dakota
South Dakota provides several sales tax exemptions, including:
- Resale: Sales made to businesses for resale are exempt from sales tax. If your SaaS product is being purchased by another business that intends to resell it, you do not need to charge sales tax, but you must obtain a resale certificate from the buyer.
- Nonprofits and Government Entities: Sales to nonprofit organizations or government entities are generally exempt from sales tax in South Dakota. However, to qualify for the exemption, businesses must obtain proper documentation, such as a sales tax exemption certificate, from the purchasing entity.
- Custom Software: Custom software, developed specifically for a client and not available for sale to the general public, is exempt from sales tax in South Dakota. This exemption applies only to software that is uniquely tailored to the customer’s needs.
It is important to maintain proper documentation for exempt sales, such as resale certificates for resale purchases and exemption certificates for nonprofit or government sales. This will ensure that your business can substantiate its claims for exemption and avoid tax-related issues.
Consequences of Non-compliance with SaaS Tax Rules in South Dakota
Failure to comply with South Dakota tax rules for SaaS businesses can lead to several consequences, including:
- Penalties: South Dakota imposes penalties for failing to collect or remit sales tax on taxable transactions. These penalties can range from 5% of the tax due for failure to file on time, with additional interest charges on unpaid tax amounts. The state may also impose a 10% penalty for intentional tax evasion.
- Audits: The South Dakota Department of Revenue (SD DOR) may conduct an audit if it suspects that your business is not complying with sales tax laws. Audits can be time-consuming and costly, and if discrepancies are found, your business may be required to pay back taxes, along with penalties and interest.
- Legal Risk: Persistent non-compliance can lead to more severe legal consequences, including lawsuits or other enforcement actions to recover unpaid taxes. This can harm a business’s reputation and financial standing.
To avoid these consequences, it is crucial for SaaS businesses operating in South Dakota to ensure they are collecting and remitting the correct sales tax, maintaining proper documentation for exemptions, and filing returns on time.
Filing and Remitting South Dakota Sales Tax
In South Dakota, the frequency with which a SaaS business must file sales tax returns depends on the amount of sales tax collected:
Filing Frequency
| Filing Frequency | Sales Tax Collected Per Month | Requirement |
| Monthly | More than $200 | Required to file monthly |
| Quarterly | Between $200 and $2,000 | May file quarterly |
| Annually | Less than $200 | May file annually |
Due Dates
- Monthly filers: Returns are due on the 20th day of the month following the reporting period.
- Quarterly filers: Returns are due on the 20th day of the month following the end of the quarter (April 20th for Q1, July 20th for Q2, October 20th for Q3, and January 20th for Q4).
- Annual filers: The return is due on January 20th for the previous year’s sales.
How/Where to File?
Sales tax returns can be filed online through the South Dakota Department of Revenue (SD DOR) website if you do not have a physical nexus. The e-filing portal is available at dor.sd.gov. It’s essential to file returns on time to avoid penalties and interest charges for late filings.
Common Sales Tax Challenges for SaaS Companies in South Dakota
SaaS businesses in South Dakota face several challenges when it comes to complying with sales tax laws:
- Nexus Misunderstanding: Many businesses struggle to understand South Dakota’s nexus rules, particularly economic nexus. SaaS businesses are required to collect and remit sales tax, even if they do not have a physical presence in the state.
- Bundled Services: If your SaaS is bundled with non-taxable services (such as consulting or training), it can be difficult to determine which components of the bundle are taxable.
- Exemption Management: Dealing with exemptions for nonprofit organizations, government entities, and resale purposes can be complicated. South Dakota provides several exemptions, but businesses must obtain the correct documentation to ensure that they are not incorrectly taxing exempt transactions.
- Multi-State Compliance: SaaS businesses that operate in multiple states face the added challenge of navigating different sales tax rules across state lines.
Simplify South Dakota SaaS Sales Tax Compliance with Commenda
Commenda simplifies SaaS sales tax compliance in South Dakota by providing a comprehensive suite of tools designed to automate and streamline the tax process, ensuring US sales tax compliance:
- Taxability Decisions: Commenda automatically assesses whether your SaaS product is taxable in South Dakota, helping you determine if you need to collect sales tax.
- Nexus Monitoring: With Commenda, you can easily track your economic nexus status in South Dakota and other states.
- Exemption Management: Managing exemptions for nonprofit, government, or resale customers is easier with Commenda’s automated exemption management features.
- Automated Filing: Commenda automates the filing of sales tax returns, ensuring that your business complies with South Dakota’s filing deadlines.
Ready to simplify your South Dakota SaaS sales tax compliance? Schedule a demo with Commenda today!
FAQs About South Dakota SaaS Sales Tax
Q. Is SaaS taxable in South Dakota? If my business doesn’t have a physical office there?
The answer to “Is SaaS Taxable in South Dakota?” is yes. South Dakota has economic nexus laws, meaning that if your business meets certain sales thresholds, such as $100,000 in sales or 200 separate transactions, you are required to collect sales tax on SaaS sales, even if you don’t have a physical presence in the state.
Q. How does South Dakota classify SaaS products for sales tax purposes?
In South Dakota, SaaS is generally considered taxable as it is treated as a form of tangible personal property or a digital product. The state classifies SaaS as taxable unless it qualifies for a specific exemption.
Q. Do I need to collect sales tax in South Dakota if I only sell subscription-based SaaS?
Yes, subscription-based SaaS is subject to sales tax in South Dakota. The state taxes these services regardless of the payment model used, whether it’s a one-time fee, a monthly fee, or an annual subscription.
Q. Are setup fees or bundled SaaS services taxable in South Dakota?
Yes, setup fees or any additional charges that are part of the bundled service are generally taxable in South Dakota. If the SaaS product and setup fees are sold together as a package, the entire amount is subject to sales tax.
Q. What are the penalties for not charging sales tax on SaaS in South Dakota?
If you fail to collect the appropriate sales tax on SaaS sales in South Dakota, you may face penalties, which can include fines, interest on overdue taxes, and potential audits. It’s crucial to stay compliant to avoid these consequences.
Q. Does South Dakota provide exemptions for SaaS sold to nonprofit or government entities?
Yes, South Dakota does provide certain exemptions for government and nonprofit organizations. These entities may not be required to pay sales tax on SaaS purchases if they meet specific qualifications. However, it’s important to verify each case based on the entity’s status.
Q. How often do SaaS businesses need to file sales tax returns in South Dakota?
SaaS businesses in South Dakota are typically required to file sales tax returns on a monthly, quarterly, or annual basis, depending on the volume of sales and the amount of tax due. Businesses should consult the state’s Department of Revenue for specific filing schedules.
Q. What’s the easiest way to automate SaaS sales tax compliance in South Dakota?
To automate SaaS sales tax compliance in South Dakota, many businesses turn to sales tax automation software. Tools like Commenda can track nexus, calculate sales tax, and generate the necessary reports to ensure timely and accurate filing of tax returns, reducing the risk of errors or missed deadlines.
