Nebraska does not tax most sales of software as a service (SaaS). However, some digital goods are taxed in the state, and some SaaS is considered taxable because of how it works or what it does.
Specifically, Nebraska taxes security services, and the state has guidance specifying that software that performs a security function, such as monitoring or controlling security cameras or equipment, is classified as a taxable security service.
Software consulting and implementation fees are also taxable, so if those services are included with the software, the entire transaction could become taxable as well.
If you’re selling SaaS, it's important to understand these rules so you can determine whether you should be charging your customers sales tax and remitting sales tax payments to the state.
Why this matters
If you sell SaaS in Nebraska, you need to understand the state’s rules governing the taxability of SaaS. You may have an obligation to collect sales tax on taxable products. Nebraska could audit your business if it suspects that you are selling in the state without collecting the required sales tax and remitting it correctly. Noncompliance could lead to fines and other penalties.
It's best to be proactive, learn the law, and ensure that you are operating within it, so your company doesn’t end up facing regulatory problems that lead to lost revenue and missed opportunities.
Taxation rules in Nebraska
Nebraska addresses the rules for sales tax on software in the state’s Reg-1-088.
Computer software is taxable in Nebraska, but according to Nebraska Revised Statutes section 088.06, "Computer software is a sequence of instructions which directs the computer to process either digital or analog data. Software does not include data such as mailing lists, even when in machine-readable form, or charges for converting data into machine-usable form."
SaaS does not fit within this definition, because the software doesn’t direct the computer owned by the end user to process data. Since SaaS isn't classified as "computer software," under Nebraska's sales tax rules, it is not subject to sales tax under the law making software taxable.
Nebraska does tax some digital goods. Nebraska revised statute section 77-2701.16 states that "gross receipts include the retail sale of digital audio works, digital audiovisual works, digital codes, and digital books delivered electronically if the products are taxable when delivered on tangible storage media."
The permanent, conditional, or temporary transfer of the right of use still counts as a sale.
However, SaaS doesn't fit within this definition either, so it becomes taxable only if it is taxed under other provisions of Nebraska law, such as when it is considered part of a taxable security service under the guidance mentioned above, or when software consulting and implementation fees are an integral part of the SaaS package.
Compliance in Nebraska
Nebraska’s rules for the taxation of SaaS can be confusing. For one thing, you need to understand whether your product is classified as security software or viewed as being bundled with consulting services (either of which could make it taxable in the state).
Beyond understanding the current taxation rules, it's important to be aware that a number of states have recently changed their tax laws so they could begin taxing SaaS. If Nebraska does the same, you'll need to know about it.
However, these issues are primarily a concern for businesses with a nexus in Nebraska, that is, businesses with a connection to the state that creates a tax obligation.
Nexus in Nebraska
Having nexus in a state means that you are required to collect tax on eligible sales there. Nexus can be physical or economic.
Physical nexus is simply a physical presence — for instance, an office, inventory, or employees — within a state's borders.
In the past, nexus could be established only by a physical presence. But in 2018, with a ruling in South Dakota v. Wayfair, Inc., the U.S. Supreme Court allowed states to set thresholds for economic nexus. These nexus thresholds vary from state to state, but they are based on sales revenue and/or the number of separate sales within a state.
In Nebraska, a business can establish nexus in several different ways. Nebraska code section 77-2701.13 establishes the definition of "doing business in this state" for purposes of sales tax.
You can establish physical nexus in Nebraska by:
- Maintaining, occupying, or using an office, place of distribution, warehouse storage place, sales or sample location, or any other place of business in the state on either a permanent or temporary basis, either directly or indirectly through any kind of subsidiary or agent.
- Having any type of representative, agent, canvasser, facilitator, salesperson, or solicitor operating under your authority (or under the authority of a subsidiary) and selling, delivering, or taking orders for your business.
- Deriving rentals from leasing any property in the state to any retailer.
- Soliciting retail sales from Nebraska residents through advertising or other means that are broadcast or installed on an electronic device in the state.
- Soliciting orders from Nebraska residents on a continuous, regular, seasonal, or systematic basis if you benefit from any activities occurring in the state or benefit from having installation, servicing, or repair facilities in the state.
- Being owned or controlled by any interest that owns or controls a retailer engaged in business in Nebraska.
- Having a franchisee or licensee operating under your trade number, if the franchisee or licensee is required to collect tax.
You can establish economic nexus if you:
- Have total retail sales exceeding $100,000 in Nebraska in the previous or current calendar year.
- Complete more than 200 retail transactions in the state in the previous or current calendar year.
Once you’ve established economic or physical nexus, you need to follow all state tax rules, including taxing SaaS in the limited situations when you are required by law to do so.
Importance of accurate tax collection and remittance
If you are selling any taxable products or services in Nebraska and you have nexus, you must:
- Register with the state.
- Collect sales tax as required on taxable items, and collect that tax at the correct rates.
- File sales tax forms at the required frequency.
- Remit sales tax payments to the state as required.
This becomes especially complicated for SaaS sellers, e-commerce sellers, and businesses selling any digital goods because of the difficulty in determining when these items are taxable and what amount of tax is due.
Numeral can make this process simple, though, by monitoring changes to tax law, tracking nexus on your behalf, and applying the correct tax rates to any taxable products that your company sells in locations where you are obliged to collect and remit sales tax.
Numeral will also register you with the state when required, file your tax forms, and remit taxes for you so you don't have to think about this issue.
Staying compliant nationwide
In every state where you do business, you are obligated to know the:
- Nexus thresholds.
- Rules on SaaS taxation.
- Tax rates.
- Filing requirements.
That's because as soon as you establish nexus somewhere, you have to begin to collect the correct amount of tax, register with the state, and make regular tax payments.
A number of U.S. states do tax SaaS, and many more have considered changing their laws to make SaaS taxable. So your business must keep up with evolving rules and requirements that vary from state to state, as well as rules and requirements in any foreign countries that you sell your software or other products into.
Adding more complexity, you also need to track rules that vary from jurisdiction to jurisdiction in some home rule states, such as in Colorado, where SaaS is not broadly taxable on the state level but is subject to tax in certain local taxing areas, including in Denver.
Numeral can keep track of all of this for you, though, so you don't have to get into the weeds on tax rules in dozens, if not hundreds, of different locations.
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Additional resources for staying compliant
Since tax rules can change over time, here are some resources that you should check regularly to help you determine whether you are in full compliance with Nebraska sales tax rules.
- Nebraska Department of Revenue Sales and Use Tax Guides
- Nebraska Sales Tax Rate Finder
- Nebraska Sales Tax Guide
Final thoughts
In short, Nebraska does not tax SaaS sales unless that software performs a security function.
The rules for taxing SaaS are complicated in Nebraska and throughout the U.S. You don’t want your company to end up being audited and penalized due to human error or a failure to understand where you have nexus or where SaaS is taxable.
