North Dakota Sales & Use Tax Guide: Rates, Nexus, Rules

Sales and Use Tax Basics in North Dakota

Sales Tax

The retail sales tax in North Dakota applies to the gross receipts of retail sales of tangible personal property, including leasing or renting tangible personal property. Notably, the sales tax is collected by table persons, either individuals or businesses, and ultimately paid by the consumers. 

Use Tax

The use tax, which serves as an equivalent of sales tax, ensures that tax is paid on tangible personal property when the seller did not collect sales tax at the time of purchase. Therefore, both individuals and businesses must pay use tax on goods brought or shipped into the state for storage, use, or consumption. These goods can be household items, clothing, equipment, or building materials, and the use tax is calculated using the same rates as sales tax.

North Dakota Sales and Use Tax Rates

North Dakota imposes a 5% statewide sales and use tax. In addition to this state tax, cities and counties may impose local taxes, as well as special taxes such as lodging taxes, lodging and restaurant taxes, and motor vehicle rental taxes. Also, North Dakota has a Gross Receipts Tax applicable to sales of alcohol at 7%, sales of farm machinery used exclusively for agricultural production at 3%, and sales of new mobile homes at 3%.

Tax-Exempt Transactions

Regarding exemptions, North Dakota legislation provides several, including those for certain government and non-profit entities, businesses, and contractors with an appropriate exemption certificate, and sales to a person from Montana. More specifically, government entities and specific federally chartered corporations, such as the American National Red Cross and Big Brothers–Big Sisters of America, are exempt, as are public and private non-profit schools. 

Additionally, certain health and care facilities, including hospitals, nursing homes, assisted living, and other licensed residential care providers, as well as qualifying voluntary health and senior citizen organizations, also qualify for exemptions on eligible purchases. While religious, charitable, and non-profit organizations are generally not exempt, churches can purchase Bibles, prayer books, hymnals, and religious textbooks tax-free under state law.

Businesses and contractors are allowed to make certain purchases without paying sales tax if they provide the appropriate exemption certificate at the time of purchase, such as a Certificate of Processing,  a Certificate of Resale, a Contractor’s Certificate, a Streamlined Sales Tax Certificate of Exemption, or the Multistate Tax Commission Uniform Sales & Use Tax Resale Certificate Multijurisdiction Form.

What is unique about North Dakota is that it treats sales to a person, whether an individual or a business, from Montana as exempt from sales tax if the purchase is made in North Dakota, totals USD 50 or more, and is removed from the state for use exclusively outside North Dakota.

Nexus Rules in North Dakota

Individuals and businesses selling tangible goods to consumers located in North Dakota become liable if they establish a nexus or substantial presence in the state. There are three main ways to establish nexus: by being physically present and by exceeding economic or marketplace thresholds.

Physical Nexus

Under North Dakota law, certain business activities create a physical nexus, requiring taxable persons to collect and remit sales tax on all sales in North Dakota. These activities include having a store, showroom, or distribution center in the state, owning or leasing physical property there, or maintaining inventory or employees there.

Economic Nexus

Following its southern neighbor's example, North Dakota introduced economic nexus rules on October 1,  2018, set at USD 100,000 in gross sales or 200 or more sales. However, North Dakota was quick to amend these rules, eliminating the 200-transaction limit, leaving only a USD 100,000 threshold in effect as of December 31, 2018.

Marketplace Nexus

The marketplace nexus is set at the same level as the economic nexus, meaning that marketplace facilitators whose taxable sales exceed USD 100,000 in the current or previous year must register, collect, and remit sales and use tax.

Taxable Goods and Services in North Dakota

While most of the sales, including rental and leasing, are subject to sales and use tax, services are generally non-taxable. Regarding food, the North Dakota Office of the State Tax Commission published guidelines on taxable and non-taxable sales, including those made through vending machines, discount coupons, and freight, as well as on the taxability of delivery or other transportation charges.

Services, such as personal and professional services, are explicitly exempt from tax. However, materials and supplies used solely in providing services are subject to sales tax when purchased. 

For example, photographers are considered retailers of tangible goods for sales and use tax purposes. Consequently, sales of photographs, portraits, prints, digital tapes, or other digital media containing images, as well as sales of film, batteries, frames, cameras, and other photographic equipment and supplies, are taxable. In contrast, providing services such as retouching, tinting, or color correction of others' photographs is not subject to sales tax.

Bundled Transactions and the True Object Test

The taxability rules for bundled transactions depend on the nature of goods and services included in the transactions, as well as the overall structure of the sale. As a general rule, the sales and use taxes are applied to the entire bundle based on the taxable goods included. 

However, there are certain exemptions to this rule. If tangible goods are sold with services, and the goods are essential to the service and the service is the primary object, the transaction is treated as a service sale rather than a bundled sale, and tax is applied according to the service’s tax status. Similarly, if taxable items in the bundle make up 10% or less of the total purchase price, the taxable portion is considered de minimis, and the transaction may not be taxed.

Also, when a bundle consists of exempt and taxable items, the taxable items are subject to tax only if they exceed 50% of the total price. Additionally, items incidental or immaterial, such as packaging, free promotional products, or items already included in gross receipts, are not considered part of the taxable bundle. Finally, if the price of an individual product is separately identified in invoices, receipts, contracts, or price lists, the sale is not treated as a bundled transaction, and tax is applied individually to each item.

E-Commerce Framework

The remote seller or out-of-state seller rules state that businesses that do not have a physical nexus in North Dakota but sell tangible goods, services, and certain digital products to customers within the state, using channels like phone, catalog, or online sales, must collect and remit sales tax, including local, once their sales into the state exceed a USD 100,000 threshold.

Moreover, once the threshold is exceeded, remote sellers must obtain a permit and begin collecting tax either 60 days after reaching the threshold or at the start of the following calendar year, whichever comes first.

Marketplace Rules

Remote sellers who use a marketplace facilitator to offer and sell goods, services, and digital products to in-state consumers are commonly referred to as marketplace sellers. A marketplace seller who received written certification from the marketplace facilitator is no longer liable for tax on sales made through that marketplace. Even if marketplace sellers have a valid North Dakota sales and use tax permit, they should not report sales made through a marketplace if the facilitator has certified its responsibility to collect and remit tax.

Digital Goods and Services

Digital goods and services, such as downloadable software, digital books, music, movies, and specified digital products, are generally taxable in North Dakota when delivered electronically to consumers. Additionally, the regulations clearly define digital automated services, software-as-a-service (SaaS), and electronically delivered entertainment or information as taxable.

However, certain exemptions do exist, including if the digital product is sold for resale, used in manufacturing tangible goods, or otherwise qualifies under specific statutory exemptions. In addition to state taxes, local taxes also apply to digital goods and services delivered to North Dakota customers.

Digital Marketplace

To be considered a marketplace facilitator, a business or individual must have a contract with marketplace sellers to help them sell products through a marketplace for compensation and to participate in activities that connect buyers and sellers. Activities or services that facilitators can engage in or provide to marketplace sellers include transmitting offers or acceptances, operating the platform or technology that enables sales, providing virtual currency for purchases, or conducting development work to facilitate sales. 

Furthermore, facilitators are responsible for tax collection if they perform functions such as payment processing, fulfillment or storage, listing goods, setting prices, branding sales, taking orders, advertising, customer service, or handling returns. Nevertheless, businesses or individuals that only process payments on behalf of a seller without participating in marketplace activities beyond payment handling are not treated as marketplace facilitators.

Digital Platform Operator

Those who meet the criteria for marketplace facilitators and exceed USD 100,000 in the current or previous calendar year must register, collect, and remit sales and use tax. Notably, all taxable sales made through the marketplace, including those made on the marketplace's own behalf, are counted toward the threshold. One additional requirement for facilitators is that they must certify to each marketplace seller that it will collect and remit all state and local sales and use taxes.

Filing and Payment Requirements in North Dakota

Taxable persons may be required to file and pay sales and use tax monthly, quarterly, or annually, depending on how frequently they make taxable sales. Filing and payment frequency are determined by the North Dakota Office of the State Tax Commissioner when a taxable person applies for a sales tax permit. All tax returns, including amended tax returns, and payments are filed and made through ND TAP. However, an amended tax return can also be mailed with instructions from the Tax Office. 

Penalties for Non-Compliance with Sales and Use Tax Requirements

Failure to file required returns or to pay due taxes is sanctioned with a 5% of the due taxes or USD 5, whichever is higher, late filing penalty of the due taxes charged for the first month a return is not filed, with an additional 5% added for each following month until the penalty reaches a maximum of 25%. A separate late payment penalty of 5% of the unpaid tax or USD 5 applies when taxable persons fail to make a timely payment.

In addition to the penalties, a 12% annual interest rate is calculated from the filing deadline until all taxes, penalties, and interest are fully paid. However, no interest is charged for the first month a return is late.