Indiana clarifies taxability of cloud computing services
- Dec 29, 2016 | Gail Cole
As technology evolves, so too must tax policy. Yet since technology evolves quickly, and tax policy doesn’t, taxability is often unclear. This is particularly true for digital goods and services. Fortunately, state tax departments can be more responsive than state legislatures, establishing and amending tax policies as needed. Recently, for example, the Indiana Department of Revenue clarified how sales and use tax applies to cloud computing services, Software as a Service (SaaS), and “various other matters relating to remotely accessed software.”
As a general rule, taxable “tangible personal property” in Indiana means personal property that
- Can be seen, weighed, measured, felt, or touched; or
- Is in any other manner perceptible to the senses.
It includes prewritten computer software, with “computer” including e-readers, electronic tablets, smartphones, and any other mobile electronic devices. Certain electronically transferred products, such as e-books, digital audio works, and digital audiovisual works, are also subject to tax in Indiana, as is prewritten computer software and purchases of software stored in a tangible medium, such as on a disk or USB flash drive.
According to the National Institute of Standards and Technology of the U.S. Department of Commerce, cloud computing is a “model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, services, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.” Three of the most common cloud computing services are commonly (though not uniquely) referred to as:
- Software as a Service (SaaS): a service provider hosts software application over the internet for a customer
- Infrastructure as a Service (IaaS): a service provider owns, maintains, operates, and houses equipment (such as hardware, servers, network components, etc.) used to support a customer’s operations, which the customer accesses via the internet in order to use the equipment
- Platform as a Service (PaaS): a service containing elements of both IaaS and SaaS
Indiana tax code doesn’t specifically address cloud computing, therefore taxability “depends on the facts and circumstances of each transaction.” Of particular significance are the following:
- The amount of control or possession the purchaser is granted in the software
- The object of the transaction
- The ownership rights, if any, the purchaser has in the software
According to the Indiana Department of Revenue, SaaS “may or may not be subject to tax.” With PaaS, “the taxability of the product depends on the nature of the software rights.” IaaS transactions are generally exempt provided the customer doesn’t purchase, rent, or lease the equipment; however, if a customer uses a dedicated server, it’s considered renting or leasing hardware and the transaction is taxable.
For example, charges for accessing prewritten computer software maintained on the vendor’s or a third party’s computer or servers are exempt, provided access is electronic via the internet, the customer isn’t transferred the software and doesn’t control or possess the software or server, and the customer has no ownership interest in the software.
When a customer pays a fee to use prewritten computer software that is maintained on the vendor’s or a third party’s computer servers for a defined period of time, it’s considered a lease of the software in Indiana and is therefore subject to tax if the customer has access to and control of the software or the server when accessed electronically via the internet.
The updated Indiana Department of Revenue Information Bulletin #8 should help taxpayers better understand their tax obligations, as it provides numerous examples of taxable and exempt transactions.
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