Panel advances bill to exempt some software from sales tax

Advocates say removing Indiana’s sales tax on many service-based software transactions would be a step in the right direction for the state’s growing tech industry.

Mike Langellier, CEO of state tech advocacy group TechPoint, recommended such a step Tuesday to the Senate Tax and Fiscal Policy Committee shortly before the panel voted 10-0 to advance legislation that would do so.

“The majority of the companies in our tech ecosystem here are smaller companies—younger companies that are in the process of growing right now,” Langellier said.

Senate Bill 257, authored by Sen. Travis Holdman, R-Markle, would remove what Langellier and others see as obstacles to these up-and-coming companies by preventing the taxation of their “software as a service,” or SaaS, sales. The bill redefines software accessed on the Internet as tax-exempt when the transaction includes a service that is the true object of the deal.

Without a new definition, Langellier said many companies and their financial partners are left confused about how much tax is realistically owed on software sales performed electronically. The current law puts Indiana companies at a disadvantage, he added.

“If an Indiana company is competing against a California company, trying to sell to an Indiana buyer, the Indiana company, if they are forced to collect the sales tax, would actually have a higher cost,” said Langellier.

In the past, software was usually purchased in physical forms, such as discs, from area stores. As technology evolved, however, an increasing number of consumers opted for software accessed online. Now growing in popularity is SaaS, a software distribution model in which a third-party provider hosts applications and makes them available to customers over the internet.

The Indiana Department of Revenue offered guidance in late 2016 that said SaaS transactions “may or may not be subject to tax,” creating more confusion for companies.

Under the bill, downloads of prewritten software could still be subject to sales taxes, but most SaaS transaction would not.

“Technology is enabling customers to be able to connect with sources of information or to get services delivered to them via the internet,” Langellier said. "It’s a different kind of paradigm than what we’ve historically seen as it related to tax on sales of physical products."

If passed, SB 257 could cause a “significant" decline in tax collections, up to $5 million alone in the first fiscal year, according to the Department of Revenue.

SB 257 would accomplish one of the goals listed in Gov. Eric Holcomb’s annual State of the State address Jan. 9.

Removing the tax—a step taken by 29 other states—would make Indiana more appealing to technology companies, he said.