Indiana Rules that Cloud-Based Solution for Webcasting is Not Taxable
Indiana decided that the taxpayer’s business was a non-taxable service, instead of a taxable software product.
By Alissa Graffius, SALT senior associate
Companies frequently use webcasts as a means to educate their employees and the public, for product launches, conferences, training and a variety of other reasons. In states that tax remote access software services or SaaS, it is often difficult to determine whether a service constitutes taxable SaaS or is a non-taxable service in which the consumer may have some access or right to use remotely-accessed software in connection with the core service.
As state tax professionals, we need to rely on state guidance in order to understand how the state may be drawing distinctions between those two situations, and such state guidance is not always available. Recently, Indiana issued a revenue ruling in which it determined that a California company that provides a cloud-based solution for webcasting is providing a non-taxable service.
The company claimed that its cloud-based webcasting service, which includes network hosting, storage, IT and computing maintenance services, is more like services commonly referred to as infrastructure as a service (IaaS).
Indiana taxes tangible personal property, which includes prewritten computer software. Additionally, the state has made clear in recent guidance that it taxes electronic access via the Internet to software maintained on servers outside of Indiana (i.e., cloud computing or SaaS) when the customer obtains constructive possession and the right to use, control or direct the use of the software.  The ruling notes that the company’s platform is operated using proprietary software controlled by the company and maintained outside Indiana. When a customer organizes an event or uploads files to the company’s platform, they do so via a web browser on a computer, and in that respect, they are using the company’s software. In addition, the software features certain “widgets” that allow the host to conduct surveys, allow viewers to submit questions, etc.
Nonetheless, the state concluded that the company is providing a nontaxable service. While there is some use of software, such usage is limited to those functions necessary to host a web event, and the widgets are part of the software that perform enhancements to the company’s core webcasting service.
The state also applied what it calls the “serviceperson” test which is used to classify a transaction as a product or a service when there are elements of both present.  The factors looked at are whether: (1) the serviceperson is primarily in the business of furnishing services or tangible personal property; (2) the tangible personal property used is necessarily incident to the service; (3) the price charged for the property is inconsequential (not to exceed 10 percent) compared to the service charge; and (4) the serviceperson pays sales tax on the property when acquired.
In this case, the state concluded that the company satisfied all of the requirements for treating its service as non-taxable. First, the company is in the business of providing a webcasting service and not software. Second, the software is necessary to allow the customer to use the service. Third, there is no separate charge for the software. Finally, the company created the software and thus did not have to pay sales tax when it was created.
Ultimately, based on this analysis, the state concluded that the “company has shown that its clients do not acquire the software for their own independent use, that they are granted a limited right to access the software, that the software functionality is limited and primarily provides the ability to host events as part of the webcast hosting service, and the software is available to its clients incident to the service provided.” Therefore the company is not providing taxable software, but rather a non-taxable service.
While rulings such as this are only binding on the taxpayers who request them, they are helpful since they provide guidance on how the state looks at these transactions. As practitioners, we are able to use this guidance to determine whether it would be analogous or distinguishable to our client’s situation. With the exponential growth of cloud-based technology and software solutions, trying to determine how a company’s service or software should be classified is often a difficult analysis.
Aprio’s SALT team has experience working with technology companies to help them understand the potential sales tax issues associated with their revenue streams in order to avoid sales tax exposure. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the February 2017 SALT Newsletter. To view the entire newsletter, click here.
 Sales Tax Information Bulletin #8 (November 2011). It should be noted that this Bulletin was replaced by Sales Tax Information Bulletin #8 in December 2016. It makes some revisions regarding SaaS and remotely accessed software. Specifically, the Bulletin provides that SaaS may or may not be taxable depending on the facts and circumstances of each transaction, “particularly with regards to the amount of control or possession the purchaser is granted in the software, the object of the transaction, and the ownership rights, if any, the purchaser has in the software.” It does not appear that the revised Bulletin would have changed the conclusions reached in the revenue ruling.
 45 IAC 2.2-4-2.
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 the matter.