North Dakota Sales Tax & Audit Guide
Straightforward Answers to Your North Dakota Sales Tax Questions.
- Do I need to collect North Dakota sales tax?
- Should I be collecting or paying North Dakota use tax?
- What do I do if I should have been collecting but haven't?
- I received an audit notice. What should I do?
- Guidance on fighting a sales tax assessment in North Dakota.
Who Needs to Collect North Dakota Sales and Use Tax?
Like most states, to be subject to North Dakota sales tax collection and its rules, your business must:
1) Have nexus with North Dakota, and
2) Sell or use something subject to North Dakota sales tax.
How is Nexus Established in North Dakota?
According to the North Dakota Department of Revenue, anyone who sells taxable tangible personal property, recreational activities admissions, or the rental of lodging accommodations must obtain a sales tax permit 30 days
before opening for business.
Any of the following establishes nexus:
(1) Maintenance of any business location in North Dakota, including any office.
(2) Ownership of real estate in North Dakota.
(3) Ownership of goods in a public warehouse or on consignment in North Dakota.
(4) Ownership of goods in the hands of a distributor or other non-employee representative in North Dakota, if used to fill orders for the owner's account.
(5) Usual or frequent activity in North Dakota by employee or representative soliciting orders with authority to accept them.
(6) Usual or frequent activity in North Dakota by employee or representative engaged in a purchasing activity or the performance of services (including construction, installation, assembly, or repair of equipment).
(7) Operation of mobile stores in North Dakota
(8) Other miscellaneous activities by employees or representatives in North Dakota such as credit investigations, collection of delinquent accounts, and conducting training classes or seminars for customer personnel in operation, repair, and maintenance of its products.
(9) Leasing tangible property and licensing intangible rights for use in North Dakota.
(10) The sale of other than tangible personal property such as real estate, services, and intangibles in North Dakota.
(11) The performance of construction contracts or service contracts in North Dakota.
Additionally, businesses that do not have a physical presence in North Dakota can establish economic nexus by exceeding a certain annual sales threshold.
Economic Nexus (Wayfair Law) and Internet Sales in North Dakota
A remote seller makes retail sales of tangible personal property, services, or specified digital products in North Dakota without a physical presence in the state. A remote seller may make sales in North Dakota in various ways, including by phone, catalog, or internet.
Remote sellershave established economic nexus and must register with the Department of Revenue to secure a North Dakota Sales Tax Permit if:
Sales of tangible personal property in North Dakota of $100,000 or more during the preceding or current calendar year are required to collect and remit North Dakota sales tax. The tax collection and remittance obligation will apply to the first calendar month after the threshold is met.
For additional information, see Wayfair Law FAQ.
Small Seller Exception
Unless qualified for the small seller exception, remote sellers with no physical presence in North Dakota must collect sales tax on taxable sales made into North Dakota. Sales tax collection by remote sellers is required ONLY IF taxable sales in the state exceed $100,000 in the current or previous calendar year.
How is the $100,000 gross revenue threshold calculated?
Gross revenue includes all taxable sales into the state in the current or prior calendar year.
Marketplace Facilitators and Sellers
A marketplace facilitator must collect North Dakota sales and use taxes on North Dakota sales made on its marketplace.
- Marketplace facilitators with physical nexus in North Dakota must collect and remit sales and use tax.
- A marketplace facilitator without physical nexus that reaches the $100,000 threshold for the first time in the current calendar year must register and begin collecting tax within 60 days after reaching the threshold or on January 1 of the following calendar year, whichever is earlier.
A marketplace facilitator must collect North Dakota tax if it meets the following criteria:
- Contracts with sellers to facilitate the sale of a seller's product through a marketplace.
- Engages, directly or indirectly, in one or more of the following activities:
- Transmitting or otherwise communicating the offer or acceptance between the buyer and seller
- Owning or operating the electronic or physical technology or infrastructure that brings the buyers and sellers together
- Providing a virtual currency that buyers are allowed or required to use to purchase products from the seller
- Conducting research and development activities related to contracting with sellers to facilitate the sale of their products through a marketplace
Participates in one or more of the following activities, directly or indirectly, concerning the marketplace seller's products:
- Payment processing services
- Fulfillment or storage services
- Listing products for sale
- Setting prices
- Branding sales as those of the marketplace facilitator
- Taking orders
- Advertising or promotion
- Providing customer service
- Accepting or assisting with returns or exchanges
Payment processors chosen by a seller to handle payment transactions, such as credit or debit cards, and whose sole activity with the marketplace sales is limited to handling payment transactions between the seller and the purchaser is not a marketplace facilitator.
A marketplace seller is a seller that sells or offers tangible personal property or other products or services subject to North Dakota sales or use tax through a marketplace owned, operated, or controlled by a marketplace facilitator. If your business sells through Amazon or a similar marketplace facilitator, you may not have to collect sales tax on those sales.
Specifically, if the marketplace facilitator certifies that they collect and report sales tax on your sales, you are off the hook. However, such sales may still count towards your total sales threshold, meaning you’ll still need to collect tax on sales made directly through your website or any other marketplaces that don’t collect sales tax on your behalf.
Which Sales are Subject to North Dakota Sales Tax?
If you have nexus in North Dakota, the next step is determining whether the products or services you sell are subject to North Dakota sales and use tax.
Unless an item is specifically exempt, sales and rentals of tangible personal property are subject to North Dakota sales tax.
The rules seem simple, but many details make applying North Dakota’s tax rules to your business challenging. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.
Common Exemptions from North Dakota Sales and Use Tax:
Exempt items include:
- Prescription Drugs
- Oxygen and Anesthesia Gases
- Medical Devices, Equipment, and Supplies
- Durable Medical Equipment includes equipment for home use, including repair and replacement parts.
- Mobility-Enhancing Equipment includes equipment sold under a doctor's written prescription, including repair and replacement parts.
- A prosthetic device includes a replacement, corrective, or supportive device sold under a
doctor's written prescription and repair and replacement parts for such a device, worn on or in the body.
- Montana Sales Tax Exemption.The sale of tangible personal property to a person from Montana is exempt if the purchaser is:
- Making a specific purchase in North Dakota
- Making a purchase of 50 dollars or more
- Removing the purchase from North Dakota for use exclusively outside this state.
- Commercial Fertilizer
- Livestock and Poultry Feed
- Agricultural By-Products for Manufacture or Generation of Steam or Electricity
- Agrichemical Tank Cleaners and Foam Marker
- Fungicides, Herbicides, and Insecticides
- Farm Machinery and Irrigation Repair Parts See the Guideline - Farm Machinery and Farm Irrigation Equipment for more information - www.tax.nd.gov/guidelines. Guideline - Exemptions
- Seeds for Planting
- Food and Food Products
- Bibles, Hymnals, Textbooks, and Prayerbooks
- Carbon Dioxide
- Gasoline and Combustible Fuels
- Liquified Natural Gas
- Water: The gross receipts from water sales, including bottled water, are exempt from sales tax. However, bottled water sales through coin-operated vending machines are subject to sales tax. Also, water sold as a prepared food in a restaurant, bar, convenience store, or similar venue is subject to sales tax.
- Magazine Subscriptions
- Coin-Operated Machines
- Commemorative Memorial Coins.
- Digital Products: Sales of items transferred electronically, including specified digital products, are exempt from sales tax. Transferred electronically means the purchaser received the product without tangible storage media. Examples of tangible storage media include USB flash drives, compact discs (CDs), and external hard disk drives.
Specified digital products are:
- Digital Audio-Visual Works: A series of related images imparting an impression of motion when shown in succession and accompanying sounds, if any.
- Digital Audio Works: Works that result from the fixation of a series of musical, spoken, or other sounds, including ringtones.
- Digital Books: Works generally recognized in the ordinary and usual sense as books.
- This exemption does not apply to prewritten computer software.
- Flight Simulators
- Used Manufactured Homes
- Transportation and Delivery Services. This exemption does not extend to freight and delivery charges associated with a product's sale.
- Hospital and Nursing Home Services
- Repair Services: Repairing, cleaning, altering, or restoring tangible personal property that belongs to others is a service, and the receipts for providing that service are exempt from sales tax. Tangible personal property sold or used in a repair is subject to sales or use tax.
The North Dakota Department of Revenue has different rules depending on the industry and the type of service.
For more details, see Industry Specific Guidance below.
Many people have questions about the taxability of Software as a Service (Saas).
Many states already impose a tax on software as a service. As these options proliferate, states are moving to update their tax laws and, naturally, impose a tax.
To determine whether you need to collect tax on software sales, we highly recommend contacting one of our sales tax professionals to help you sort it out.
You can find more details about North Dakota sales tax and Software as a Service here but we've provided the basic information below to help you get started.
Computer “software” includes:
- Operating or executive programs that include the programming system or technical language upon which the basic operating procedures of the computer are recorded. The operating program serves as an interface with user-applied programs and allows the user to access the computer's processing capabilities.
- Applied programs that include the programming systems or technical language, including the media on which such language is recorded or designed, either for application in a specialized use or upon which a plan for the solution of a particular problem is based.
Applied programs include payroll processing, general ledger, sales data, spreadsheet, word processing, and data management programs. Typically, storage media can transfer applied software programs from one computer to another.
- Storage media includes hard disks, floppy disks, compact disks, diskettes, magnetic tape, cards, or other media used to store information readable by a computer.
Under North Dakota law, prewritten (canned) software is subject to tax; however, custom software is generally exempt from tax.
- Sellers may transfer Prewritten (canned) programs to a customer through punched cards, magnetic tape, or other storage media or by listing the program instructions.
- Tax applies to the sale or lease of the storage media or program listing on which such prewritten programs have been recorded, coded, or punched.
- Tax applies to canned programs, whether the title to the storage media on which the program is recorded, coded, or punched passes to the customer or the program is recorded, coded, or punched on storage media furnished by the customer.
- The temporary transfer of possession of a program, for consideration, for direct use, or to be recorded or punched by the customer or by the lessor on the customer's premises, is a sale or lease of tangible personal property and is taxable.
- Tax applies to the entire amount charged to the customer for a canned program. Where the consideration consists of license fees, royalty fees, or program design fees, all fees, present or future, whether for a period of minimum use or extended periods, are included in the purchase price subject to tax.
- The sale of a canned program is a taxable transaction, even when remote telecommunications transfer the program from the seller's place of business to or through the purchaser’s computer. A canned program may be delivered to a customer electronically or by load and leave and considered a taxable transaction.
- Suppose the purchase of the maintenance contract is not optional for the purchaser. In that case, the charges for the maintenance contract are taxable, including the consultation services which are part of the sale or lease of the prewritten program.
- If the purchase of the maintenance contract is optional with the purchaser, but the purchaser does not have the option to purchase consultation services separately from the storage media improvements or error corrections, then the charges for consultation services are taxable as part of the sale or lease of storage media.
- If the purchaser has an option to contract for the consultation services separately from the storage media, then the charges for the consultation services are nontaxable.
Hardware and Software for Resale
- Computer machines, equipment, and programs purchased or leased tax-free for resale are subject to use tax if they are put to a taxable use at any time after the exempt purchase. The sale of tangible personal property previously leased or rented is subject to sales or use tax.
Data & Information Services
- The sale of statistical reports, diagrams, graphs, microfilm, microfiche, photo recordings, or other information produced or compiled by a computer and sold or reproduced in substantially the same form as it is made is a sale of tangible personal property. If the information from which the seller compiled such reports was furnished by the same person to whom the finished report is sold, the original report is not subject to tax.
- When additional copies of records, reports, manuals, and tabulations are provided, tax applies to the charges made for the additional copies.
- Additional copies are all copies more than those produced simultaneously with the production of the original and on the same printer where the copies are prepared by using different programs or the same programs to produce the same output or by other means.
- If no separate charge is made for additional copies, tax applies to that portion of the gross receipts on which the additional computer time, the cost of materials, and labor costs to produce the additional copies bear to the total job cost.
- Charges for copies produced by photocopying or other means are subject to tax.
Shipping & Handling
- Freight, delivery, and other transportation charges, including shipping and handling charges and setup charges, are always considered part of the selling price. The freight, delivery, and additional transportation charges are taxable if the sale is taxable.
- If the delivered product is exempt from sales tax, then the freight, delivery, and other transportation charges are also exempt.
- Delivery charges billed to the customer by delivery services that are not making the sale of tangible personal property remain exempt from sales and use tax.
While the general sales tax rules seem straightforward, applying those rules can get tricky when gray areas arise. The North Dakota Department of Revenue provides some specific guidance for the following industries:
- Advertising Agencies
- Auto Parts Supply Stores
- Bars, Lounges, and Taverns
- Clubs and Lodges
- Coin-Operated Machines
- Dental Supply Companies, Dental Laboratories, and Dentists
- Discounts and Coupons
- Exempt Organizations
- Eye Care Specialists
- Farm Machinery and Farm Irrigation Equipment
- Feed, Seed, and Farm Chemicals
- Financial Institutions
- Fitness Centers
- Freight, Delivery, and Other Transportation Charges
- Funeral Homes
- Grocery Stores, Convenience Stores, and Delicatessens
- Home Furnishings Supply Stores
- Hotels and Motels
- Lease or Rental of Motor Vehicles
- Licensed Motor Vehicle Dealers
- Local Taxes by Location Guideline
- Nurseries, Greenhouses, and Florists
- Orthopedic Supply Stores
- Printers and Publishers
- Radio and Television
- Rental and Leasing Companies
- Repair Services
- Sand, Gravel, and Scoria
- Sales to American Indians
- Service Stations and Garages
- Shooting Preserves, Game Farms, and Hunting Clubs
- Sign Companies
- Snowmobiles and ATVs
- Special Events
- Taxability of Local Government Sales & Purchasers
- Telecommunications Infrastructure Development Exemption
- Welding and Machine Shops
Determining Local Sales Tax Rates in North Dakota
The North Dakota sales tax rate is 5% for most retail sales, with the following exceptions:
- Alcohol 7%
- New farm machinery used exclusively for agriculture production 3%
- New mobile homes 3%
Local taxes are also imposed in addition to the 5% statewide sales tax.
Local Sales and Use Tax Tables
Here you can look up local North Dakota sales tax rates. Or find your city’s local tax rate in the chart below:
*Exact tax rates vary. Occupancy fees and taxes are not included in this table.
I Should Have Collected North Dakota Sales Tax, But I Didn't
Many of our competitors suggest Filing a Voluntary Disclosure Agreement
in each state. This is a one-size-fits-all solution that isn't always the best. Our sales tax professionals will work with you to determine your business's best and most cost-effective solution.
If you determine your business has nexus, but you have not collected North Dakota sales tax, here are your options:
1. Register and pay back taxes, penalties, and interest, or
2. Complete a VDA to cut penalties (and, in some cases, reduce your tax liability and avoid interest).
Here is what you need to know about each option to make the best decision for your business:
Option 1: Register to Pay Back Taxes, Penalties, and Interest.
A VDA is not cost-effective if the past liabilities and penalties are minimal. Sometimes the best resolution for a business is to register with North Dakota and pay back taxes, penalties, and interest.
Be wary of the tax professionals recommending a VDA in these cases. They want to make a buck rather than look out for your best interests.
When to consider registration and payment:
- If you established nexus less than 3 or 4 years ago.
- The sales tax penalty is LESS than the professional fees charged for the VDA.
- Your business does NOT have a sales tax collected issue.
Beware: Registering does not generally end past liabilities.
If you're unsure what your past liabilities are, contact us. Our state tax professionals work with you so you can make the right choice for your business.
Option 2: Voluntary Disclosure Agreement (VDA)
North Dakota's lookback period: The standard lookback period is three years.
In many situations, voluntary disclosures are a valuable tool to reduce extended periods of past exposure.
The voluntary disclosure limits the lookback period to three years. So, if you should have collected sales tax over the past ten years but didn't, you may benefit from doing a VDA.
A VDA may be a good option for you if:
- You established nexus more than 3 or 4 years ago.
- You have a sales tax collected but not remitted issue.
- The sales tax penalty savings is MORE than the professional fees charged for the VDA.
What to Expect During an Audit
The typical audit process is shown in this flowchart. Detailed guidance for each North Dakota audit process stage follows in the sections below.
North Dakota regularly audits businesses required to charge, collect, and remit various taxes in the state. Many audits begin with a call from a North Dakota Department of Revenue sales tax auditor. Shortly after the call, your business will receive a Notification of Intent to Audit. This notification confirms that you were lucky enough to be chosen for a North Dakota sales tax audit.
A Notice of Determination stating the reason for the assessment and the amount will be sent to you by the Tax Commissioner no later than 12 months from the commencement of the audit.
It is good to start with getting a state and local tax professional involved to prepare for the audit.
I Received a North Dakota Sales Tax Audit Notice. What Should I Do?
Businesses that receive a sales tax audit notice need to consider the following questions:
- If you don’t have sales tax audit experience, how can you trust that the state's auditor abides by the rules and follows proper procedures?
- How will you know when to provide documents or when to push back?
- Do you thoroughly understand your sales and use tax areas of exposure?
- Controlling the audit is paramount to limiting exposure and shaping the results. Are you confident in doing that on your own?
Unless you can confidently answer these questions, hiring a professional is most likely to be the best option.
Contact us to learn how our sales tax professionals can give you the peace of mind and confidence you’ll need during your audit.
Visit our resource pages for more information to help you make critical decisions during your North Dakota sales and use tax audit.
What to Expect from a North Dakota Sales Tax Auditor
Here is a summary of the general audit process:
- The auditor will conduct pre-audit research.
- The auditor will often schedule and perform an entrance conference.
- The auditor will request records (many of which the auditor is not entitled to and does not need)
Once the auditor receives the necessary records, they will compare your North Dakota sales and use tax returns to your federal income tax returns or bank statements to determine whether you reported all applicable or gross sales on your North Dakota sales tax return(s).
NOTE: A slight error in how the tax was charged on even a single type of transaction can add up to a significant sales tax liability.
Once the auditor is confident all sales are accounted for, they will:
- Review your exempt and out-of-state sales.
- Conduct a use tax audit – the auditor will request accounts documents to ensure you adequately paid use tax on applicable purchases.
Common areas audited include:
- Advertising Expense
- Auto & Truck Expense
- Repair and Maintenance
- Office Expense
- Miscellaneous Expense
If the auditor determines that a 25% discrepancy has occurred in a single reporting period and it is past the 3-year statute of limitations, audit assessments can be made in the period the discrepancy occurred up to 6 years from the date the return was due or filed, whichever period expires later.
If a business buys an item online without paying use tax, the business is still obligated to remit the tax to North Dakota. Believing otherwise often leads to shocking results for the unsuspecting taxpayer during an audit. Here is more information on North Dakota Use Tax.
If you have questions about your situation, contact us to discuss it with one of our tax professionals.
After the Audit – Understand and Defend Your Businesses Rights
Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report with corresponding work papers to support the North Dakota sales and use tax assessment.
It is advisable to have a sales tax professional present during this meeting. This is your first opportunity to see the auditor's findings. You'll want to push back on areas where they have overstepped their bounds or misapplied North Dakota's sales tax laws.
It's best to hold off on agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged.
|Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel weren't well versed in the sales tax laws that, if challenged, could have reduced their sales tax liability.|
We'll cover the process of challenging a North Dakota sales tax audit assessment in detail in the following sections.
Contesting Audit Findings with the Auditor
North Dakota Sales Tax Audit Protest Process Flow Chart
NOTE: If the deadlines are missed, it can be tough to get the case reopened.
After an audit, the auditor will issue a Notice of Determination (AKA the audit report). It's essential to review and understand its implications carefully.
The audit report:
- Details of the auditor's findings
- Describes any proposed audit adjustments
- Shows the amount of tax, interest, and penalty due
If you disagree with the proposed changes, you may request an informal conference with the auditor. You must request an informal conference and attempt to resolve the case with the auditor.
Audit Closing Conference
The taxpayer has a short period to contest the findings with the auditor. Any issues with the results are handled as follows:
1. Issues related to exemptions, proof of tax paid, and calculations are worth addressing with the auditor.
2. Legal interpretations of sales tax law are often not resolvable at this stage.
After this conference, the auditor will adjust the audit assessment, and a Notice of Determination will be issued.
If you cannot resolve this with the auditor, the next step is to appeal/protest the issue.
You have the right to protest, stating your disagreement with the assessment, within 30 days of the assessment.
Protest Rights and Audit Finding Confirmation
If you disagree with an audit's findings, you must file an appeal 30 days from the Notice of Deficiency date.
- The appeal must state why the assessment, the tax, interest, or penalties are incorrect. If the Tax Commissioner believes your statement of grounds is incomplete, you must be provided with an opportunity to perfect your statement. This statement of grounds may be filed up to 90 days after the Notice of Determination.
- The Tax Commissioner must provide you with a detailed response to your statement of grounds within 90 days. If you wish further explanation, the Tax Commissioner must provide clarification.
If you have received a Notice of Deficiency and haven't talked to someone experienced in North Dakota State tax, now is the time. Do it before these deadlines are missed.
No later than nine months, plus extensions, after the statement of grounds, the Tax Commissioner must send you a Notice of Reconsideration, which states the amount of the final assessment and the reasons.
Administrative Hearing with The North Dakota Department of Revenue
If you still disagree with the assessment, you may file an administrative complaint up to 30 days after the Notice of Reconsideration.
- The Tax Commissioner will send a Notice of Intent to proceed to a hearing to you no later than 30 days after your administrative complaint is received.
- The Tax Commissioner must file an answer in response to the complaint not later than 20 days after the Notice of Hearing.
- An administrative hearing must be held no later than 18 months after the administrative complaint.
North Dakota’s Office of Administrative Hearings is the state’s administrative court forum. It hears cases against various state agencies and is presided over by independent administrative law judges. While you technically can represent yourself, it is advisable and strongly recommended to have an experienced sales tax attorney represent you at the hearing. For all practical purposes, presenting evidence and developing the record is critical to resolving your case. Our team has decades of experience representing businesses in administrative court.
The Commissioner must issue a decision no later than 30 days from the conclusion of the hearing.
You may appeal the Commissioner's decision to the North Dakota District Court.
Our team has handled hundreds of administrative court cases. It can help your company receive the resolution you are entitled to. Get in touch with us today.
Settling a North Dakota Sales Tax Liability
After any critical notices are issued, settling your North Dakota sales tax case with the North Dakota Department of Revenue is possible by filing a North Dakota Offer in Compromise. The business must meet specific criteria to qualify, but you can get better results negotiating here than with the auditor. However, knowing a fair settlement from an unreasonable settlement will be challenging without experience and knowledge of North Dakota tax laws.
DO NOT attempt to negotiate a settlement without an experienced North Dakota state and local tax lawyer or other professional.
Contest a North Dakota Jeopardy Assessment
North Dakota may issue a Notice of Jeopardy Determination in certain situations.
The jeopardy assessment gives the North Dakota Department of Revenue the right to try to collect immediately.
Due to the jeopardy nature, the taxpayer only has a very short time to contest the assessment and must place a security deposit to fight the issue.
Suppose you can't resolve the case within the agency. There's still one chance to fight your North Dakota sales tax assessment - North Dakota District Court. We don't generally recommend it, but you always have the option to skip the agency protest process and file it in tax court. Neither party wants to spend the time and resources on the uncertainty of the tax court. So, challenging the assessment can effectively maximize your settlement potential, but, at this stage, it is imperative that you have an experienced representative.
Other North Dakota Sales Tax Resources
If you have received a Notice of Assessment and haven't talked to someone experienced in North Dakota State tax, now is the time. Do it before these deadlines are missed.
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