Indiana
Indiana
PODCAST

IN: Department Addresses Software and Scope of P.L. 86-272

In a recent revenue ruling, the Department of Revenue addressed whether an S-Corporation would have Indiana nexus if it developed a custom software application for an Indiana-based contract manufacturer.

Podcast Transcript

In a recent revenue ruling, the Department of Revenue addressed whether an S-Corporation (the company) would have Indiana nexus if it developed a custom software application for an Indiana-based contract manufacturer. The software would be developed and formally validated in Florida at the company’s location. The parties’ anticipated a minimal level of follow-up support. The company requested a ruling as to whether it would incur corporate income tax obligations or individual income tax obligations as a result of developing and selling the software to an Indiana customer.

Under Indiana law, gross receipts derived from sales of “computer software” are treated as sales of tangible personal property for purposes of the Indiana income tax. The Department noted that the use of the term “computer software” in the income tax law is broader than “prewritten computer software,” which is treated as tangible personal property for sales tax purposes. In other words, custom software, which the company would be selling to the Indiana customer, is not treated as tangible personal property for sales and use tax purposes.  However, because all software is treated as such for income tax purposes, the protections of Public Law 86-272 applied to the company. The Department ruled that based on the facts presented, the taxpayer’s activities did not appear to exceed the solicitation of sales, even with the transfer of software into Indiana. However, the Department cautioned that if the taxpayer performed more than a minimal amount of services in Indiana related to the software, such as maintenance or support, the company may exceed the protections of Public Law 86-272. The Department also noted that, as an S Corporation, the company would not be subject to corporate income tax, but its shareholders would be subject to Indiana individual income tax. Please contact Marc Caito at 317-951-2434 with questions on Revenue Ruling #2018-01IT. 

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