I have often commented that in an effort to tax emerging cloud services, taxing authorities have struggled to fit these new products into their existing tax regimes. As states attempts to tax SaaS as the sale of prewritten computer software continue to be successfully challenged (See Michigan Court Cloud Computing Services: Nontaxable Services), with a lack of express statutory authority to tax, states are motivated to consider other enumerated services – information services, data processing, amusement services, or telecommunications services. This was recently the case in Indiana, where Indiana has proved that a little creativity goes a long way.
In Indiana Revenue Ruling No. 2015-08ST (3/7/2017), the Indiana Department of Revenue ruled that sales of cloud-based texting services are subject to Indiana sales and use tax because the services constitute a telecommunications service. The taxpayer’s texting software service allowed hotels and hotel guests to send texts back and forth through cloud-based software owned and maintained by the taxpayer. The texting service did not require the download or installation of any software or tangible personal property. Although the Department concluded that the texting service was not a taxable service or taxable transfer of software or other tangible personal property, it found that the service met the definition of a taxable “telecommunication service,” which is defined as the “electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or amount points.” In addition, the Department noted that although “telecommunications service,” does not include “data processing and information services,” the “taxpayer’s mobile messaging service service would not qualify as data processing.”
While the Department taxes telecommunications services, it only taxes intrastate telecommunications services. However, given the customer was a guest at the hotel, the Department ruled that the telecommunication service was intrastate and therefore a retail transaction subject to Indiana sales and use tax. It is also noteworthy, that the Department ruled that because the texting service met the definition of telecommunications services, it was also subject to Indiana’s utility receipts tax which is also imposed on telecommunications services.
This interpretation serves as a reminder that Taxpayers need to closely analyze their SaaS models and review each state’s policies and provisions carefully – the states can be unpredictable in this space.
Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:
- SaaS Characterized as Taxable Telecommunications Service
- Pennsylvania Tax on Software Support Services: Ruling Re-issued
- Illinois Finally Rules on SaaS
- Tennessee’s Situsing of Accessed Software Runs Afoul
- Chicago Taxes the Cloud