Indiana Adopts Sales Tax Exemption for SaaS

Making good on his State of the State promise to provide clarity on the previously murky topic of software-as-a-service (SaaS) and its sales tax status, today Governor Holcomb signed Senate Bill 257 into law.

For years the tech community and businesses in general have grappled with Indiana’s taxation of software – and specifically software-as-a-service. Was SaaS taxable as the sale of a good, or was it exempt as the provision of a service? No one really seemed to know with any level of certainty. This is a big deal, especially considering SaaS makes up such a large portion of Indiana’s tech economy:

• The recently released Indianapolis Tech Census reports that marketing and sales SaaS companies had the highest 2017 revenue growth rate of all technology companies, with 56 percent of companies reporting annual revenue growth over 100 percent.
• TechPoint, an accelerator and promoter of Indiana’s technology community, is almost exclusively promoting jobs that are directly or indirectly related to SaaS marketing and development.
• The 2017 VC Report indicates that most investments made in Indiana technology companies in 2017 were SaaS-related.

While the Indiana Department of Revenue made an attempt to clarify its policy in December 2016 via a revised information bulletin on the topic, its guidance was limited, unclear, and often confusing.

But now, with the passage of Senate Bill 257, sellers and buyers of SaaS products have clearer statutory guidance on how to handle sales and use tax. Effective July 1, 2018, a transaction in which a user purchases, rents, leases, or licenses the right to remotely access prewritten computer software:

1. Will not be considered to be a transaction in which prewritten (“canned”) computer software is delivered electronically, and
2. Does not constitute a retail transaction

Transactions that involve the transfer of canned computer software by tangible medium (i.e., on a disc, a USB flash drive, etc.) or by electronic download will continue to be subject to sales tax in Indiana.