Providing SaaS and a Free Mobile App are Not Subject to Indiana Sales Tax

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By: Aspen Fairchild, SALT Senior Associate

At a glance

  • The main takeaway: A new ruling from the Indiana Department of Revenue suggests that SaaS products and corresponding mobile applications are not subject to sales tax.
  • Why it matters to you: If you’re a SaaS provider and offer downloadable software or mobile apps, this could potentially be beneficial, but analyzing sales taxability could grow more complicated depending on how your transactions are structured.
  • Next steps: Aprio’s State and Local Tax (SALT) team can help you structure transactions to minimize risk and comply with sales tax obligations.

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The full story:

These days, it is common for web-based software — commonly referred to as “software as a service” (SaaS) — to offer or include a corresponding application that mobile phone users can download. The download itself is typically free, and the mobile application may provide the same or more limited features that are available on the web. In other cases, the app may be more of a complementary piece to the web-based software, offering certain tools that make software usage easier or more efficient.

When businesses offer SaaS as well as mobile applications (which are electronically downloaded), the potential sales tax consequences must be addressed given different state rules. This was the subject of a recent Indiana Department of Revenue (Department) ruling, in which the Department ruled that neither the taxpayer’s web-based software application nor its mobile application for customers were subject to sales tax.[1]

The case in question

The taxpayer provides a web-based fleet management service that allows customers to handle administration, management and recordkeeping for motor vehicle fleets. The taxpayer hosts the software on its own servers, and customers can only access it via the internet; they cannot download, install or transfer the software in any way.

The taxpayer also started providing an optional mobile application that its customers could download that can be used in conjunction with the software. However, the mobile capabilities are limited, as the application is typically used by truck drivers to upload information such as fuel purchases, vehicle condition and mileage. The mobile application does not support any data reporting and analysis; that feature can only be accessed through the web portal. The mobile application was offered for free and did not change the pricing for the web-based software.

Based on the facts presented, the Department ruled that the taxpayer’s sale of its software application and offering a free mobile application are not subject to sales and use tax. Indiana imposes sales tax on retail transactions, which are transfers — in the ordinary course of business — of tangible personal property for consideration.[2] Tangible personal property includes prewritten computer software, which is “software…that is not designed or developed…to the specifications of a specific purchaser.”[3] Prewritten computer software that is remotely accessed over the internet is not considered a retail transaction and is not subject to sales and use tax; however, software that is downloaded electronically is taxable.[4]

Therefore, when the Department considered these two transactions independently, it concluded that neither are taxable. First, since the web-based software application is accessed through the internet, it is not considered to be downloaded electronically and therefore is not a retail transaction. Second, since the mobile application is offered for free, it is also not a retail transaction because there is no consideration received by the taxpayer.

The bottom line

The sales tax rules in Indiana and the facts of this case — most notably that the mobile application is optional, free and does not provide the full functionality found in the web-based software — provide support for the Department’s ruling. However, in Indiana and other states that don’t tax SaaS but do tax electronically downloaded software, the manner in which the transactions are structured could make the sales tax analysis more complicated.

For example, what if the SaaS and mobile application are both necessary, or the mobile application really provides the same full functionality as the SaaS? What about situations where the SaaS model requires a downloaded plugin to be installed on the user’s computer? Aprio’s SALT team has experience with state rules and guidance addressing these issues and can assist your business with structuring transactions to minimize risk and ensure that you are compliant with your sales tax obligations.

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Aspen Fairchild, SALT Senior Associate, at aspen.fairchild@aprio.com or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the September 2021 SALT newsletter.

[1] Indiana Revenue Ruling 2020-14ST (July 22, 2021).

[2] In. Code § 6-2.5-4-1(b).

[3] In. Code § 6-2.5-1-24.

[4] In. Code § 6-2.5-4-16.7(b).

Disclosure

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.

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