Indiana to exempt software as a service from sales tax

There’s long been confusion surrounding the taxability of sales of Software as a Service (SaaS) in Indiana. Clarity is on the way thanks to Senate Bill 257.

In 2016, the Indiana Department of Revenue published an information bulletin that addressed the taxability of SaaS, Infrastructure as a Service (IaaS), and Platform as a Service (PaaS). It was helpful, but the statement, “Depending on the factors of the transaction and arrangement, SaaS may or may not be subject to tax,” left many businesses at a loss.

Under SB 257, remotely accessed prewritten computer software is now clearly exempt as of July 1, 2018. The exemption is set to expire July 1, 2024.

According to the measure, a person that sells, rents, leases, or licenses for consideration the right to use prewritten computer software delivered electronically is a retail merchant making a retail transaction.

However, “a transaction 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: 1) is not considered to be a transaction in which prewritten computer software is delivered electronically; and 2) does not constitute a retail transaction.” In other words, such sales (rentals, leases, etc.) are exempt.

Governor Eric Holcomb approves, saying the legislation “will help make Indiana a leader in supporting the tech community by exempting all software as a service from Indiana’s sales tax. It’s a simple move that will make a big difference.” He also noted that Indiana will be “one of only four states to exempt software as a service in state statute.” In many states, the taxability of SaaS and similar services is determined by the Department of Revenue.

The Indiana Chamber of Commerce, which lobbied for the exemption, said it “is important not just for tech companies, but for those who do business with them.” They say the state will “reap very real economic benefits” from the change. However, it’s also expected to reduce sales tax revenue by $5.7 million to $13.4 million during the 2019 fiscal year.

Learn more about software and sales at the Avalara Resource Center.