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BREAKING: Indiana Enacts Cloud Software Tax Exemption

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 of State Legislators, legislators and executive officials should consider whether their state is imposing its transaction tax on cloud based services via administrative action alone, and if so, take action to ensure the state’s position is clear and statutory. Notably, a minority of states (less than 10, including Indiana) have a specific statutory cloud software exemption or imposition.

Indiana is not alone in its desire to legislatively exempt cloud-based services and provide clarity in this largely silent area of the law. In Arizona, an ad hoc legislative interim committee was formed in 2017 to review the taxation of digital goods and services. This initiative has since developed into comprehensive digital goods and services legislation (SB 1392 and HB 2479). This legislation would provide much-needed certainty to Arizona taxpayers that for years have been attempting to reconcile dated state and municipal Transaction Privilege Tax (TPT) laws with no clear direction in the area of remote software services, Arizona Department of Revenue and local enforcement efforts and rulings taking the position that various cloud-based services are subject to tax, and class action risk. The legislation pending now would put an end to this, and exclude the gross proceeds from the sale, lease or licensing of digital services (including cloud-based software services) and digital goods that are remotely accessed by customers from the state and municipal TPT, as well as the use tax. The legislation also specifies that downloaded prewritten computer software—regardless of delivery method and digital goods transferred electronically—are taxed under the retail classification of TPT or the use tax. The comprehensive digital goods and services legislation has passed the House and is pending a final vote in the Senate. Stay tuned!

© 2020 McDermott Will & EmeryNational Law Review, Volume VIII, Number 82
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About this Author

Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

202-756-8180
Eric Carstens Tax Attorney McDermott Will Emery
Associate

Eric D. Carstens is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office. He focuses his practice on state and local tax matters.

Eric assists clients with state tax controversy, compliance and multistate planning across all states for a variety of tax types and unclaimed property. He engages in all forms of taxpayer advocacy, including litigation, legislative monitoring and audit defense. He works closely with several of the Firm’s taxpayer coalitions focused on specific state tax policy issues such as the taxation of digital goods and services and unclaimed property.

Eric has co-authored a number of articles in publications such as State Tax Notes and the Journal of Multistate Taxation and Incentives on various state tax issues and is an active contributor to the Inside SALT blog.

Eric received his J.D. in 2014 from The George Washington University Law School. He earned his B.A. in 2011 in political science from Elon University. He currently attends Georgetown University Law Center where he is pursuing a L.LM. in Taxation.

Eric is admitted to practice in the District of Columbia. 

202 756 8353
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