Breaking: Indiana Enacts Cloud Software Tax Exemption

Author:Mr Stephen Kranz and Eric Carstens
Profession:McDermott Will & Emery

This morning, Indiana Governor Eric Holcomb signed a bill into law that will exempt cloud-based software transactions from State Gross Retail and Use Taxes, effective July 1, 2018. The signing took place at the headquarters of Indiana-based cloud service provider DemandJump, Inc.

Specifically, Senate Enrolled Act No. 257 (which was unanimously passed by both chambers of the General Assembly) will add a new section to the Indiana Code chapter on retail transactions that specifically provides 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: (1) is not considered to be a transaction in which prewritten computer software is delivered electronically; and (2) does not constitute a retail transaction." The new law will also clarify that the sale, rental, lease or license of prewritten computer software "delivered electronically" (i.e., downloaded software) is subject to the Gross Retail and Use Taxes.

Practice Note

Governor Holcomb and the Indiana General Assembly both made it a priority to provide cloud software providers with much-needed clarity regarding their Indiana collection obligation. This comes after years of increasingly convoluted and complex rulings on various subsets of cloud-based software and services by the Indiana Department of Revenue (DOR), which took the position that "constructive possession" of software through remote means was a taxable transaction. Despite the DOR's enforcement efforts in this area, the fiscal estimates for this legislation assumed that the DOR is collecting on only 40 percent of remotely accessed software transactions, creating a lack of parity for similarly situated software providers. Indiana businesses had identified this concern to the Indiana Chamber, which advocated for this exemption and clarification effort throughout the legislative process.

We commend Governor Holcomb, the General Assembly and the Indiana Chamber for their efforts to acknowledge this area of need and create a clear, workable solution that will increase compliance and decrease controversy in Indiana going forward. Consistent with the Cloud Based Services Principles adopted by the National Conference...

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