While Indiana saw a short legislative session at the beginning of 2018, the state ended with a big victory for tech companies looking for clarity on the software-as-a-service (SaaS) tax policy.

Lack of clarity in current legislation

In 2016, the Indiana Department of Revenue determined that cloud-based or subscription-based software “may or may not be subject to tax.” Chris Atkins, then the Revenue Department Commissioner, explained to Hayleigh Colombo of the Indianapolis Business Journal in November 2017, that an eight-factor test determines whether you should collect sales tax, which depends on the facts and circumstances of each transaction. That lack of definitive stance created confusion for tech leaders in the state, and, from our governor’s perspective, put Indiana at a disadvantage to other states who are competing for entrepreneurs and talent.

For companies that build and sell software, like DemandJump and Formstack, it was clear that their leadership needed to explain how the lack of clarity impacted their bottom line.

Erin Eberly, a partner at Katz, Sapper & Miller and co-chair of the firm’s Technology Industry Services Group, spoke with us about the benefits of the proposed legislation from a business and liability perspective.

Prior to this proposed change in law, “our technology clients were forced to spend valuable resources sorting through the complexities of Indiana’s SaaS sales and use tax rules — or lack thereof,” said Erin. “It was never really clear if they should collect and remit sales tax on the products they developed, and they were left to determine how much risk they were willing to assume. For example, if a company chose not to collect sales tax on their SaaS product in an effort to keep costs down for their customers, there was a chance that the State of Indiana might later determine they should have. The company was then left to foot the bill of the assessment.”

Erin further points out that the costs associated with lack of clarity could be passed onto the consumer, and that the change in legislation is not entirely self-serving for technology companies. “So although this policy simplifies the lives of technology companies, it ultimately benefits businesses across all industry sectors,” she said.

Unlike a the software sold on compact discs, could-based software isn’t a tangible product that exists or lives in one place. It’s constantly being upgraded, maintained and distributed, which means defining where the software lives outside of the cloud is next to impossible. In Indiana, we tax products, not services, but where does SaaS fit in that framework?

The proposal

Instead of an eight-factor test, a one-factor test would be implemented to make it clear that SaaS companies that deliver a service over the internet are not to charge or collect sales tax.

This proposal was initially backed by Indiana Governor Eric Holcomb; Micah Vincent, the Director of the Indiana Office of Management and Budget; and Brandt Hershman, Senate Tax Chairman (R-Buck Creek).

However, the legislation met its challengers, namely Representative Tim Brown (R-Crawfordsville). While the bill could increase competitive odds for Indiana tech companies, it was seen as a potential loss of up to $10 million in revenue to the state. That competitive advantage is difficult to quantify, but Governor Holcomb’s team estimates that the ability to compete at the same level as our neighboring states is enough to make up for the potential loss in revenue. Brown considered charging SaaS sales tax to individuals instead of companies, in turn increasing the potential tax revenue, but his proposal was met with little support.

The tech community stepped up to assist with explanations of why they felt strongly about forgoing sales tax. Those individuals included: DemandJump CEO Christopher Day, ClearObject CEO John McDonald, TechPoint CEO Mike Langellier, and Formstack CEO Chris Byers, among others.

The Indiana Chamber’s Technology and Innovation Council, led by Mark Lawrance, provided crucial support for connecting tech leaders to the legislative leaders who needed to better understand the complexities of the situation.

The solution

All of the vocalization from the Indiana Chamber and the tech community paid off last week when, on March 6, the Senate voted 49-0 in favor of Governor Holcomb’s proposal. The bill was signed on Friday, March 23 at DemandJump’s offices in downtown Indianapolis amongst many of the tech leaders who championed the legislation.

“This was a great example of public-private collaboration,” said Mike Langellier. “We not only achieved clarity so companies across the state now know how to interpret sales tax on SaaS applications when they administer it, we made Indiana one of only four states to create a competitive advantage by making it not taxable.”

“We are thrilled about the passage of the SaaS legislation, and proud that Governor Holcomb, his administration and legislators worked together in such a unified and non-partisan way. This policy promotes building wealth for the citizens of Indiana and growing revenue for the state in the long term,” said Christopher Day. “This simple but powerful statement that SaaS is not taxable sends a message to businesses all across the U.S., and even globally, that Indiana is focused on building a productive and prosperous business environment that is inviting to all types of companies. It’s one of many reasons why Indiana is a national leader in commerce and tech, which is evidenced by great home built companies including Aprimo, ExactTarget, Interactive Intelligence, Angie’s List and our new tech friends including Salesforce, Infosys, WIPRO, Genesys and HomeAdvisor that now have a significant presence here.”

“As with many policy issues, this was an evolutionary process. What legislation looks like at the beginning is typically not what emerges at the end,” said Mark Lawrance, who leads the Indiana Chamber’s Technology and Innovation Council. “The Indiana Chamber’s tax policy expert, Bill Waltz, deserves credit, for helping lead this effort to a successful conclusion. We appreciate the various stakeholders who helped explain the importance of this legislation.”

ClearObject CEO John McDonald credits several people for their willingness to collaborate effectively for this legislation. “This has really shown me how we are so much stronger when we work together. I credit Christopher Day for pointing out the need to do this, Amy Waggoner from Salesforce for providing support and impact to the issue, and Mike Langellier for immediately starting the ball rolling by setting up a meeting with Micah Vincent to discuss it. Micah quickly found Adam Krupp, our new Department of Revenue Commissioner, and Justin McAdam, the OMB General Counsel and policy director, who led several meetings to understand how best to approach it. Mark Lawrence from the Indiana Chamber of Commerce brought in Bill Waltz, who leads their tax policy efforts, who in turn brought in national experts from a law firm in Chicago to advise us all on language and the positive implications for Indiana as a leader on this issue.” John also credits Speaker Brian Bosma, the Indiana Chamber, the Department of Revenue and the Indiana State Legislature who all worked in harmony on behalf of this bill.

Chris Byers of Formstack sees impact of this bill not just in Indiana, but on a global perspective. The company hires talent in Indiana but a portion of their workforce is remote and works all over the world. “The passage of the SaaS tax exemption is a strong vote in favor of keeping Indiana on the leading edge of a pro-technology focus. As a business, we appreciate the efforts the governor and legislature have invested in supporting this positive culture. In addition, as we compete with companies all over the world, we are excited that we will not be put at a competitive disadvantage as compared to companies that also sell without the burden of sales tax. This results in a big win and parity for consumers.”

Governor Holcomb acknowledged in this Inside INdiana Business video clip that Indiana is now a leader in this space, and it sends a message coast-to-coast that “we want to do the business of the future, right here.”