Governor, key lawmaker differ on tech taxation exemptions

An Indiana House panel on Thursday unanimously advanced a bill regarding the taxation of cloud- or subscription-based software that conflicts with Gov. Eric Holcomb’s agenda.

Holcomb asked lawmakers earlier this year to exempt software as a service from Indiana’s 7 percent sales tax, a move that could bolster the local tech economy but cost the state $10 million in lost revenue per year.

But the House Ways and Means committee voted Thursday on a proposal that only partially would fulfill Holcomb’s request: It would exempt from taxation "software as a service" sold from business to business, but individuals who bought SaaS would have to pay a 3 percent sales tax. The bill passed the committee, 18-0.

“We want to grow our technology companies in Indiana,” said Ways and Means Chairman Rep. Tim Brown, R-Crawfordsville, who drafted the proposal. “There’s a lot of things happening that are very exciting.”

Brown said clarifying the state’s SaaS taxation was a priority because “we’re going more to a service economy.” Right now, he said, he understands the governor’s frustration that it’s unclear where Indiana stands on the issue.

“Do we tax software? In a yes or no question, we are a yes,” Brown said. “The governor wants us to be become a no. The issue is, it’s a little more complex than yes or no.”

Brown said he has talked to Holcomb’s staff about his proposal and “they have some trepidation that we would be different than other states.”

“I want simplicity, but I also want fairness,” he said.

The proposal next goes to the full House for a vote.

Brown said the final proposal would be worked out in future negotiations. A Senate bill on the issue, which is more in line with Holcomb’s request, passed out of that chamber and will now go through the House.

The estimated net fiscal impact from Brown’s bill is an increase in sales tax revenue of $400,000 to $1 million annually.

Representatives of Gov. Holcomb didn't immediately respond to IBJ's request for comment.

The tech community so far doesn't appear to be on board with Brown's proposal.

Formstack CEO Chris Byers told IBJ that taxing SaaS "doesn't make much sense because of the ongoing service and support—this isn't just a one-time product purchase."

"It seems like it should apply the same to the consumer," Byers said. "They're continuing to get service along the way so they should be able to get the same benefits as a business."

ClearObject CEO John McDonald told the House committee that Brown's proposal was "noble but it might be a little difficult to apply in practice" because SaaS services are "used by both consumers and businesses alike."

In the past, most tech firms sold software to customers on a compact disc at places like Best Buy, where buyers paid a sales tax—just as they did on a camera, a book or a washing machine. The purchase entitled a customer to a license or single version of that software, which was permanently theirs to use, maintain and store on their computer or server.

Now, the software-as-a-service industry—which includes big companies like Salesforce and smaller firms like Doxly—increasingly sells subscriptions to web-based software instead of selling physical products. The company maintains and continually updates the product, fixes bugs, and hosts the software on remote servers.

Sometimes, software is provided through a hybrid model. Customers download it onto their computer but it’s maintained through subscription. If the customer doesn’t pay, the software stops working.