Indiana: Various Purchases of Software Exempt from Sales and Use Tax

The Indiana Department of State Revenue recently addressed whether a taxpayer was entitled to a refund on its purchases of software and payments for access to software. The taxpayer was in the business of providing security and workforce productivity services. It purchased software for various purposes, including a software product that was downloaded and hosted on third-party servers outside of Indiana. This software was used by the taxpayer’s employees within and outside of Indiana. The taxpayer argued that it was entitled to a refund of a portion of the Indiana sales tax charged on the software purchase because not all of the users were in Indiana. Applying Indiana’s sourcing law, the Department concluded that the software purchase was not subject to Indiana sales tax because the taxpayer downloaded the software to the third-party servers outside of Indiana and therefore received the property at the server’s location. As such, the taxpayer was entitled to a full refund of the Indiana sales tax paid.  

The Department also addressed the taxability of software as a service (SaaS) for periods prior to July 1, 2018 when a specific exemption for remotely accessed software became effective. Under Sales Tax Information Bulletin 8, from November 2011 to December 2016, remotely accessed software was subject to sales tax regardless of whether the software constituted a service or whether the software user had an ownership interest in the software. As such, tax applied to the taxpayer’s SaaS purchases during this period. From December 2016 forward, the Bulletin was updated to provide that remotely accessed software may be subject to sales tax if the circumstances specifically point to a degree of "constructive" ownership of the software. The revised Bulletin listed a number of factors to consider when determining whether a purchaser obtained a possessory or ownership interest in pre-written software. The Department reviewed in detail several different types of remotely accessed software purchased during this period and concluded that in all cases ownership and control was not transferred to the taxpayer. Therefore, the taxpayer was entitled to a refund of the sales tax paid on the SaaS purchases that occurred between December 2016 and June 30, 2018.  The purchases made on and after July 1, 2018 were also exempt pursuant to the statutory exemption. Finally, the Department concluded that certain of the taxpayer’s other software purchases were non-taxable because they were used for research and development. For more information on Memorandum of Decision 04-20191189R, please contact Dave Perry at 513-763-2402.