Are you paying sales tax on Software-as-a-Service (SaaS) and other software in North Carolina? You may not need to.
With the increase in hybrid and work-from-home models and employees’ locations spanning across the U.S., many companies today license enterprise software that can be accessed by their employees no matter where they reside. For companies with a North Carolina presence, software vendors may be incorrectly relying on default rules or outdated guidance and collecting sales tax on licensed software from customers.
North Carolina organizations paying sales tax on SaaS and other software are encouraged to look at their current software licenses and ascertain if they may be exempt from various sales taxes.
North Carolina Sales & Use Tax Exemptions for Software Purchases
North Carolina provides multiple sales and use tax exemptions for software, including:
- Software purchased or licensed to run on an enterprise server operating system.1
This exemption could apply to downloaded software that is licensed, installed, and hosted on a company-owned (or leased) enterprise server for use by employees within the organization.
- SaaS that is licensed and hosted on a third-party software provider’s server.
The North Carolina Department of Revenue’s (NCDOR) Sales and Use Tax Bulletins specifically state that SaaS is not subject to sales tax.2 The NCDOR also published a private letter ruling that states, “North Carolina does not currently impose sales and use tax on revenue from access to cloud-based software accessed electronically via an internet connection.”3
- Software that meets the definition of data center support equipment, located and used at the qualifying data center in North Carolina.
“Data center support equipment” includes property that is capitalized for tax purposes under the Internal Revenue Code and is used for the provision of a service or function included in the business of a data center owner, user, or tenant, or software for distributed and mainframe computers and servers, data storage devices, network connectivity equipment, and peripheral components and equipment.4 The data center exemption also extends beyond software to other types of expenses at a qualifying data center.
How to Obtain a Sales & Use Tax Refund in North Carolina
North Carolina taxpayers that have been paying sales or use tax on licenses of nontaxable or exempt software may be eligible to obtain refunds from their software vendors. North Carolina is one of a handful of states that do not allow a purchaser to obtain a refund of sales tax paid to a vendor directly from the NCDOR.
The purchaser must contact the vendor to request the refund. Then, the vendor obtains a refund or credit for the sales tax overpayment from the NCDOR. The vendor may accomplish this through a refund claim, amended returns, or claimed credits on current period returns.
North Carolina’s general statute of limitations for obtaining an overpayment refund is the later of:
- three years after the due date of the return; or
- two years after payment of the tax.5
How Forvis Mazars Can Help
Identifying and recovering overpayments and potentially reducing future tax expenses are top of mind for many executives. Forvis Mazars has nine offices in North Carolina and a state and local tax team with more than 100 professionals prepared to assist you in identifying software purchases that may qualify for a sales tax refund and to help work with your vendors to recover those overpayments. For more information, please reach out to your advisor at Forvis Mazars.
- 1“N.C. Gen. Stat. §105-164.13(43a)a, Returns and Payment of Taxes,” ncleg.gov, 2024.
- 2“NCDOR Sales and Use Tax Bulletins,” ncdor.gov, January 2024.
- 3“NCDOR SUPLR-2021-0005 Private Letter Ruling,” ncdor.gov, February 2, 2021.
- 4“N.C. Gen. Stat. §105-164.13(55a), Important Notice: Qualifying Datacenter,” ncdor.gov, December 15, 2015.
- 5“N.C. Gen. Stat. §105-241.6, Statute of Limitations for Refunds,” ncleg.gov, 2024.