Update: SB 257 was signed by the governor on March 23, 2018.

The Indiana General Assembly approved a bill (SB 257) that, if enacted, would temporarily exempt SaaS transactions from the state's sales and use tax. The bill will be sent to Governor Holcomb for consideration; the Governor in his 2018 State of the State indicated his support for this measure. Once the Governor receives the bill, he will have seven days to act on it or it will become law without his signature.

If enacted, effective July 1, 2018, the bill would add new Ind. Code Section 6-2.5-4-16.7, which explicitly expands the definition of a "retail merchant making a retail transaction" in Indiana's sales tax law to include individuals and entities that sell, rent, lease or license the right to use prewritten computer software delivered electronically.

Under the new provision, transactions in which an end user purchases, rents, leases or licenses the right to remotely access prewritten computer software over the Internet, over private or public networks, or through wireless media (i.e., SaaS transactions) will not constitute the provision of prewritten computer software through electronic means, and specifically would exclude such transactions from the definition of a "retail transaction" for purposes of Indiana's sales tax law.

Currently, the Indiana Department of Revenue (DOR) has administratively interpreted the Indiana sales tax law's definition of "tangible personal property," which includes "prewritten software" to apply to SaaS transactions. The bill would override that position effective for periods after June 30, 2018.

The new provision, however, would expire July 1, 2024.

Implications

Indiana taxpayers that license software via a SaaS model should consider delaying entering into new licenses or renewing existing licenses until after June 30, 2018 in order to take advantage of the new sales tax exception offered by this new law as it is unlikely that licensing agreements entered before that date would be regarded by the DOR as qualifying for any refund or exemption even if the license period extended beyond that date.

For periods before July 1, 2018, Indiana's administrative position that SaaS is subject to sales tax because it constitutes the taxable sale of tangible personal property is still vulnerable to legal challenge. Indiana, a Streamlined Sales and Use Tax full-member state, adopted a nearly identical position with respect to taxing SaaS as Michigan did. The Michigan Court of Appeals overturned the Michigan tax administrator's position in Auto-Owners Insurance Co,¹ resulting in refund opportunities for taxpayers in that state. It is possible that an Indiana court would follow the Michigan ruling although it is not by any means binding or precedential for any Indiana court.

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ENDNOTES

¹ Auto-Owners Insurance Co. v. Dept. of Treas., No. 321505 (Mich. Ct. App. Oct. 27, 2015).