House changes approach on software taxation legislation

Both chambers of the Indiana General Assembly and Gov. Eric Holcomb are back on the same page when it comes to advancing a bill this session regarding the taxation of cloud- or subscription-based software.

Early this month, the House advanced a bill that conflicted slightly with Holcomb’s agenda, which is to exempt "software as a service," or SaaS, from Indiana’s 7 percent sales tax—a move that could bolster the local tech economy but reduce the state's tax revenue by $10 million per year.

The House bill only partially fulfilled Holcomb’s request, exempting from taxation SaaS sold from business to business while taxing individuals who bought the services.

But, on Wednesday, the House Ways & Means committee abandoned that approach.

Instead, the committee voted 20-1 to slightly amend the Senate’s SaaS bill—which was more in line with Holcomb's agenda—to state that “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” is not a retail transaction—thus meaning it is not subject to sales tax. Software that someone buys at the store or downloads onto their computers would still be taxed.

Tech leaders said they thought the House's previous approach was unworkable because it would be difficult for companies to tell whether it was businesses or individual consumers that were doing the purchasing and who they should tax.

They also thought the House’s new approach would be helpful to the industry.

ClearObject CEO John McDonald said the new approach is "a little more straightforward, easy to understand and implement.”

He also said it could convince tech companies to move to Indiana, because they “might want to do [business] in a state that doesn’t cause them to collect sales taxes and remit them.”

He acknowledged that when the companies sell their products to people in other states, they may have to collect and remit tax.

“That doesn’t necessarily resolve us of every Department of Revenue in every state,” McDonald said. “But it does say in my home state, I don’t have to collect and remit sales taxes for the stuff I’m doing here locally in Indiana, for Indiana companies.”

But the bill doesn’t just affect tech companies, which is why the Indiana Chamber has also been involved in trying to fight for the exemption as well.

As more companies use SaaS in their day-to-day operations, the chamber says that exempting the products from taxes will save non-tech companies money when purchasing the services.

Mark Lawrance, the chamber's vice president of engagement and innovation policy, said the changes made to the SaaS taxation plan this session will likely make the concept of what’s taxable and what’s not “more clear” for businesses.