As is often the case, the House and the Senate each have their own ideas on how best to address big issues. That is the current circumstance regarding the taxability of software utilized as the means of providing a service. Obtaining greater clarity on this subject is a priority of the Chamber and the Governor.
Senate Bill 257 embodies the efforts of the administration to clarify tax law in this arena. It was largely formulated by the Department of Revenue (DOR) and the Office of Management and Budget to serve as guidance for what is taxable and what is not. The bill is basically a codification of recent DOR rulings interpreting and applying its own information bulletin, which outlines a complicated set of factors and tests. The legislation is focused on what constitutes a retail transaction (sale) of a tangible good. Essentially, the position of DOR is to tax the sale of prewritten off-the-shelf type software, including such software even if it is downloaded or accessed over the internet. But if it is customized software or software utilized in connection with what is primarily a service to a customer, it is omitted from the new statute and deemed not taxable.
The determinations in gray areas will remain fact sensitive, but the language is intended to make it clearer that software services are not taxable. The statutory provisions should operate to make people in the software-as-a- service (SaaS) industry more comfortable in concluding that they do not need to collect sales tax, unless they are engaged in a transaction that falls squarely into the retail product sale category as set out in the legislation.
On the other hand, HB 1316 takes a different approach. It uses similar language as is in SB 257 but adds several unique twists to the picture. First, it creates a new lesser rate for prewritten off-the-shelf type of software – with the apparent objective of identifying and monitoring the tax revenues associated with these transactions. It excludes transactions where the software is acquired by a business to perform its core business purpose. This business-to-business exemption component is of course a very positive thing and should be embraced. Finally, it looks to the long-term potential of sales involving software as the industry continues to expand, plus creates a trigger reducing the standard sales tax rate for when total collections exceed $250 million (a threshold so high that it is hardly foreseeable in the near future).
Perhaps it makes the most sense to combine the good pieces of these competing bills to produce the best end result. The Chamber sees much merit in doing all that is possible to clarify the state of the law regarding SaaS as is addressed in the Senate bill. This is needed and would be a positive step. But while unique aspects of the House bill present some real concerns, it also includes the most solid of tax principles – don’t tax business inputs. Exempting business-to-business transactions would prove a terrific encouragement to the SaaS industry to conduct their business in Indiana.
In the second half of the session, the Chamber will be leading the charge to resolve the SaaS clarification issue to the fullest extent possible.
Resource: Bill Waltz at (317) 264-6887 or e-mail: [email protected]