Indiana Taxpayers’ Potential Sales & Use Tax Refund for Cloud-Based Solutions
Author: Ken Taylor
The Indiana Department of Revenue (DOR) recently released a Letter of Finding and Revenue Ruling. These may provide a basis for taxpayers to seek refunds of Indiana sales or use tax previously paid on cloud-based solutions. In both findings, the DOR determined cloud-based solutions weren’t taxable.
The Letter of Finding determined the taxpayer—an in-state vendor that provided computer information technology (IT) support for computer hardware, software, network planning, installation, maintenance and backup services—didn’t owe “additional gross retail tax on online backup software because the software is provided incident to the provision of service.” The taxpayer protested the DOR’s assessment of additional sales tax on the online backup software subscription services for which the taxpayer didn’t collect Indiana sales tax. The hearing officer determined the online backup software that was transmitted to the taxpayer’s customers wasn’t taxable as prewritten computer software; rather, it was inconsequential to the true object of the transaction—providing data backup service. The hearing officer determined the primary purpose of the taxpayer’s business was providing IT services to customers and not prewritten software. Additional factors supporting the conclusion were that customers can’t use the software independently of the vendor’s server and that they delete the software upon terminating the subscription service.
In the Revenue Ruling, an out-of-state vendor requested the DOR determine whether its cloud-based services would be exempt from Indiana sales tax as a service or taxable as either a telecommunication service or the transfer of prewritten software, specific digital products or other tangible personal property when providing an otherwise nontaxable service. As described, the vendor’s cloud collaboration service offering replaces certain customer-owned and -maintained software applications and related computer hardware that support a customer’s telecommunications equipment as well as hosting of software owned by the vendor’s customers. The vendor explained that its service is provided remotely, meaning when customers’ phones and workstations access the vendor’s out-of-state servers, they’ll be provided with necessary and/or enhanced telecommunication functionalities. Customers pay a monthly fee calculated on the number of users. The monthly subscription fee covers “hardware, software, virtual server instances charges, required storage charges, rack space charge,” among other costs. A customer may add services such as the hosting of the customer’s software application.
The DOR determined the cloud collaboration service offering doesn’t meet the statutory definition of a “telecommunication service” found in Indiana Code Title 6. Taxation IN Code Section 6-2.5-1-27.5, as the vendor isn’t transmitting, conveying or routing information. The DOR also determined the vendor wasn’t transferring prewritten software, specific digital products or other tangible personal property when providing an otherwise nontaxable service. In support of this conclusion, the DOR acknowledged that the vendor’s customers may access software and use the computer hardware of the vendor as part of the cloud collaboration service offering. However, the vendor is the party actually using the software and hardware in support of the services offered. Therefore, the DOR concluded the vendor was providing telecommunication-supporting services that aren’t an enumerated taxable service. Lastly, the DOR concluded that the service was being provided outside of Indiana and, therefore, any taxes that may be due on the vendor’s purchases wouldn’t be subject to Indiana sales or use tax.
As noted, one ruling was for an in-state vendor that failed to collect Indiana sales tax and the other was an out-of-state vendor. The commonality of the two determinations is the performance of a service where a vendor’s customers may receive prewritten software or simply access prewritten software that’s determined to be inconsequential. These rulings seem to imply a change in Indiana’s position on cloud-based solutions. To learn more about how this decision could affect your organization, contact your BKD advisor.