Indiana Permits Taxpayer to Claim Temporary Storage Exemption for Software Licenses

Some states have rules that allow sellers to only collect sales/use tax based on the use in the state at issue. But this concept has not yet been widely adopted, and some taxpayers have tried to utilize other rules to achieve similar results.

By Jess Johannesen, SALT senior associate

When a vendor sells a tangible product to a consumer, it is generally easy to determine where sales/use tax must be collected – the state where the goods are delivered to the purchaser. With the evolution of technology and the growth of service-based companies, it has become much more complicated to determine where a software license or a service is “delivered” since oftentimes there is no delivery address. A software-as-a-service (SaaS) provider might bill a customer with a billing address in New York for 1,000 subscriptions, but in fact only 100 of those subscriptions will be used by the customer’s employees in New York. The others will be used by the customer’s employees located in other states. A vendor is unlikely to know this and so, without more information, will likely apply sales/use tax based on the tax rules in the state of the customer’s billing address.

A few states have adopted what may be referred to as multiple points of use rules that enable a purchaser of certain services or software licenses to provide a certificate or other documentation to the seller indicating where such services or licenses will be used. The rules typically permit the seller to only collect tax based on the use in the state at issue. This concept has not yet been widely adopted, however, and taxpayers have tried to utilize other rules to achieve similar results.

One such attempt was the subject of a recent Indiana Letter of Finding issued by the Department of State Revenue addressing the application of a “temporary storage” use tax exemption to a taxpayer’s purchase of software licenses that were used outside of Indiana. [1] For the years covered by the ruling, the term “storage” means “the keeping or retention of tangible personal property in Indiana for any purpose except the subsequent use of that property solely outside Indiana.” [2]

The taxpayer is an Indiana company that provides medical research services, and the taxpayer has locations in Indiana, other states and outside the country. The taxpayer bought nearly 2,500 software licenses from five different vendors that were delivered to the taxpayer in Indiana. It is uncontested that the sale of such computer software is subject to sales and use tax, but the taxpayer did not pay sales tax on these purchases.

During an audit, the Indiana Department of Revenue assessed use tax on 100 percent of the software licenses that the taxpayer bought. In the Letter of Finding, the Department of Revenue determined that, based on the temporary storage rule, a portion of the licenses were indeed exempt as the taxpayer proved that the licenses were used outside of Indiana.

However, a significant portion of the licenses were “nowhere” licenses that the Department of Revenue held were subject to use tax since they were not used outside the state. For example, the facts show that 1,000 licenses were purchased from one vendor. Of these 1,000 licenses, 63 total licenses were deployed – two licenses were used in Indiana, and the other 61 licenses were used outside of Indiana. The remaining 937 licenses were not deployed and, therefore, not used in a state outside of Indiana. Since the taxpayer bought all 1,000 licenses in Indiana, the Department of Revenue held that these 937 “nowhere” licenses were effectively “used” within Indiana since the taxpayer could not prove that they were used outside of the state. As a result, the taxpayer was allowed an exemption for 61 of these licenses and was assessed use tax on the remaining 939 licenses.

Applying sales/use tax from the sale of services and intangibles will continue to be difficult for taxpayers given the lack of guidance in this area. However, companies should be aware that there may be ways to minimize sales/use tax obligations when these items are being used concurrently in multiple states. HA&W’s SALT team can assist your company with these issues and any other sales and use tax matters that your company faces.

Contact Jess Johannesen, SALT senior associate, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Indiana Dept. of State Revenue Letter of Finding No. 04-20140506, 08/01/2015.

[2] Ind. Code §6-2.5-3-1(b). It is worth noting that effective on 1/1/2016, Indiana statutes now specifically define “temporary storage” as “the keeping or retention of tangible personal property in Indiana for a period of not more than one hundred eighty (180) days and only for the purpose of the subsequent use of that property solely outside Indiana.” Ind. Code §6-2.5-3-1(d), eff. 1/1/16.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.

X

Send this to a friend