New Indiana Law Provides Clarity on SaaS

On March 23, 2018, Indiana Gov. Eric Holcomb signed Senate Bill (SB) 257, making Indiana one of only a few states with a law exempting software as a service (SaaS) from sales and use tax in the state. The legislation, which was part of Holcomb’s legislative agenda, now provides clarity regarding the taxability of SaaS—a change the governor hopes will attract technology companies to Indiana.

SB 257 clarifies Indiana’s treatment of prewritten software delivered electronically and SaaS by adding a new section to the Indiana Code (IC). Effective July 1, 2018, IC 6-2.5-4-16.7 specifically provides that a person who sells, rents, leases or licenses for consideration the right to use prewritten computer software delivered electronically is making a retail transaction subject to sales and use tax. However, it also provides that a transaction in which an end-user purchases, rents, leases or licenses the right to remotely access prewritten computer software over the internet, private or public networks or through wireless media shall:

• Not be considered a transaction in which prewritten computer software is delivered electronically

• Not constitute a retail transaction that would otherwise be subject to tax

It should be noted that IC 6-2.5-4-16.7 expires July 1, 2024.

Indiana’s laws did not specifically address the taxability of remotely accessed software before SB 257’s passage. However, the Indiana Department of Revenue (IDR) attempted to provide administrative guidance on the matter by issuing an updated Sales Tax Information Bulletin #8 (ST IB #8) in December 2016. The prior version of ST IB #8 (November 2011) indicated SaaS, although referred to as “cloud computing,” was taxable in Indiana. However, subsequent to a number of Letters of Findings and Revenue Rulings indicating certain SaaS transactions were not taxable, the IDR revised ST IB #8 to provide criteria it indicated would be used to determine whether a transaction was taxable. However, the updated ST IB #8 was difficult to apply, and vendors and consumers of SaaS remained frustrated with the lack of clarity on the issue.

It should be noted that nothing in SB 257, including legislative hearings, public comments or fiscal notes, would seem to imply ST IB #8 was previously incorrect. As such, there may be opportunities to file sales and use tax refund claims for periods prior to July 1, 2018. To learn more about this potential opportunity, contact Ken or your trusted BKD advisor.