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RSM US: Indiana Exempts Software as a Service From Sales and Use Tax (Indianapolis)

2018-04-02T13:18:06+00:00April 2nd, 2018|

On March 23, 2018 Indiana Governor Eric Holcomb signed Senate Bill 257, exempting from Indiana’s seven percent sales and use tax, transactions that result in an end user purchasing, renting, leasing or licensing the right to remotely access prewritten computer software over the Internet, over private or public networks or through wireless media – transactions commonly referred to as Software as a Service (SaaS), or cloud computing. Senate Bill 257 is effective on July 1, 2018.

The bill provides a significant departure from Indiana’s current tax treatment of these types of transactions which were subject to tax and routinely targets of state sales and use tax audits. While no legislative or regulatory authority previously addressed the taxation of SaaS, the Indiana Department of Revenue historically took the position that remotely accessed prewritten software was taxable under Indiana law when a customer gained constructive possession and the right to use, control or direct the use of the software by a user in Indiana.

Senate Bill 257 does not impact the taxability of prewritten software transferred in a tangible medium or delivered by load and leave. Those items remain subject to sales and use tax.

Takeaways

Taxpayers who purchase or sell SaaS through subscription or periodic billings should review their contracts to make sure that qualifying transactions are exempt on and after July 1, 2018.

Indiana’s Legislative Services Agency, Office of Fiscal and Management Analysis, issued a Fiscal Impact Statement stating that 2019 tax revenues are expected to be negatively impacted by $5.7 million to $13.4 million as a result of this legislative change. In spite of the negative fiscal tax impact of the new law, it has been reported that the change will ultimately benefit Indiana’s technology business community.

The new law becomes effective for all transactions on or after July 1, 2018 and is scheduled to expire on July 1, 2024.