NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Webcasting and Virtual Communications

Authority: IC 6-2.5-1-24; IC 6-2.5-1-26.5; IC 6-2.5-1-27; IC 6-2.5-1-27.5; IC 6-2.5-1-28.5; IC 6-2.5-2-1; IC 6-2.5-2-2; IC 6-2.5-4-1; IC 6-2.5-4-6; IC 6-2.5-4-16.4; 45 IAC 2.2-1-1; 45 IAC 2.2-4-2; Asplundh Tree Expert Co. v. Indiana Dep't of State Revenue, 38 N.E.3d 744 (Ind. T.C. 2015); Sales Tax Information Bulletin #8 (November 2011); Streamlined Sales and Use Tax Agreement (May 16, 2016)

A taxpayer ("Company") is seeking an opinion as to whether Company's product is a service that is not subject to the Indiana sales and use tax when sold to clients located in Indiana. Specifically, Company seeks a ruling regarding whether "the charges by Company for its online webcasting solution and usage fees associated with such solution [are] subject to Indiana's state's sales and use tax."

Company is a California corporation. Company provides the following facts regarding its request for a revenue ruling:

Based on the foregoing facts, Company requests a ruling as to whether its product is a non-taxable service. Company states that Company contracts with their customers to provide network hosting, storage, IT and computing maintenance services to their customers. Company asserts that the service provided is more closely related to a web-hosting service commonly referred to as an Infrastructure as a Service (IaaS).

Pursuant to IC 6-2.5-2-1(a) and IC 6-2.5-2-2(a), sales tax is imposed on retail transactions made in Indiana. A retail transaction is defined in IC 6-2.5-4-1(b) as the transfer, in the ordinary course of business, of tangible personal property for consideration. IC 6-2.5-4-1(c) goes on to provide in pertinent part:

"Tangible personal property" is defined in IC 6-2.5-1-27 as:

Except for certain enumerated services, sales of services generally are not retail transactions and are not subject to sales or use tax. 45 IAC 2.2-4-2 clarifies the taxability of services as follows:

A unitary transaction is clarified in 45 IAC 2.2-1-1(a) as follows:

Sales of specified digital products are also included in the definition of retail transactions. IC 6-2.5-4-16.4(b) provides that a person engages in making a retail transaction when the person (1) electronically transfers specified digital products to an end user; and (2) grants to the end user the right of permanent use of the specified digital products that is not conditioned upon continued payment by the purchaser. "Specified digital products," as currently defined by IC 6-2.5-1-26.5, include only digital audio works (e.g., songs, spoken word recordings, ringtones), digital audiovisual works (e.g., movies), and digital books. Products "transferred electronically" are defined at IC 6-2.5-1-28.5 to mean products that are "obtained by a purchaser by means other than tangible storage media."

Pursuant to Section 333 ("Use of Specified Digital Products," effective Jan. 1, 2010) of the Streamlined Sales and Use Tax Agreement ("SSUTA," effective May 16, 2016), of which Indiana is a signatory, "A member state shall not include any product transferred electronically in its definition of 'tangible personal property.'" Pursuant to the same section of the SSUTA, "ancillary services," "computer software," and "telecommunication services" are excluded from the term "products transferred electronically."

In order to stay in conformity with the SSUTA, Indiana may not impose sales tax on a product transferred electronically by basing the product's taxability on inclusion of the product in the definition of tangible personal property. It is important to note that "ancillary services," "computer software," and "telecommunication services" are not restricted by the phrase "product transferred electronically." However, IC 6-2.5-1-27.5(c)(8) explicitly excludes ancillary services from the definition of telecommunication services, which are taxable under IC 6-2.5-4-6. Accordingly, ancillary services are not subject to sales tax in Indiana.

Based on the foregoing, Indiana may impose sales tax on products transferred electronically only if the products meet the definition of specified digital products, pre-written computer software, or telecommunication services.

"Prewritten computer software" is defined in IC 6-2.5-1-24 as follows:

"Telecommunication services" is defined in IC 6-2.5-1-27.5 as follows:

(Emphasis added).

"Ancillary Services" is defined in IC 6-2.5-1-11.3 as follows:

With regard to the taxability of remotely accessed software, the Department in Sales Tax Information Bulletin #8 (November 2011) ("STIB 8") provides the following guidance:

Even though software may be located outside Indiana, the Indiana Tax Court has indicated that something need not necessarily be physically present in Indiana for it to be "used" in Indiana. Asplundh Tree Expert Co. v. Indiana Dep't of State Revenue, 38 N.E.3d 744, 748 (Ind. T.C. 2015) (quoting Fisher & Co., Inc. v. Dep't of Treasury, 282 Mich.App. 207, 769 N.W.2d 740, 743 (2009). Further, the Court stated the following:

Company's webcasting and virtual communications platform is operated using proprietary software controlled by Company and maintained outside Indiana. In order for a customer to organize an event, they open Company's website from a web browser on a computer. In that respect, customers are using software electronically via the internet.

To distinguish Company's software from the guidance in STIB 8, Company maintains that it offers a web hosting service. The Department in a prior Revenue Ruling (Revenue Ruling 2008-16ST, (November 14, 2008), 20081217 Ind. Reg. 045080927NRA) held in part that web hosting fees are a service charge and are not subject to sales and use tax in Indiana. Similarly, Company's Customers can host "Audio Events," "Video Events," "Web Conferences," all through the webcasting and virtual communications platform on Company's website, and can upload their own content from Company's website to the cloud.

Further, in another prior Revenue Ruling (Revenue Ruling 2011-05ST, (December 9, 2011) 20111130 Ind. Reg. 045110713NRA), the Department concluded that a taxpayer's charges for online access to an information database were not taxable, but charges for the use of certain add-on remotely hosted software applications were taxable under the assumption that the customer obtained a possessory interest in the applications. With regard to the access to the database, the Ruling held that "Taxpayer's sales of access to its online database and its upgraded data packages via the Internet are not subject to Indiana sales and use tax." Regarding the workflow add-ons, however, the Ruling held that "customers are purchasing access to prewritten computer software for which they, the customers, have a possessory interest. On that basis, Taxpayer's sales of access to its workflow add-ons to end-user customers via the Internet are subject to Indiana sales and use tax when provided to customers located in Indiana."

In the case at hand, Company's software allows its customers to upload files and host various types of web-based communication, which has the same limited functionality as the database as the above-mentioned Ruling; however, the software also features certain "widgets" that can be used by the host to conduct surveys, allow viewers to submit questions, display videos or images, and so on. Having said that, the basic platform of the software is strictly to allow a customer to host events. The customization available through the widgets can be differentiated from the workflow add-ons in the Ruling in that the add-ons were separately purchased software features which performed functions beyond the database access at issue in the Ruling, whereas the widgets are part of Company's software platform and perform enhancements to the basic webhosting and virtual communication platform.

Furthermore, the serviceperson test found at 45 IAC 2.2-4-2 applies in this instance. Company satisfies all of the requirements of 45 IAC 2.2-4-2(a) for finding that the webcast hosting services provided by Company are non-taxable. First, Company is primarily in the business of webcast hosting and virtual communications, and not selling tangible personal property. 45 IAC 2.2-4-2(a)(1). Second, the software is for the purpose of enabling Company's customers to upload files and run events incident to Company's webcast hosting and virtual communications service. 45 IAC 2.2-4-2(a)(2). Third, customers are not charged for the software, but for the minutes of meeting time they use. 45 IAC 2.2-4-2(a)(3). Fourth, the software was created by Company, and thus Company did not have to pay sales tax when it was created or purchased. 45 IAC 2.2-4-2(a)(4). Company's software is available to Company's customers incident to the service provided, which is hosting a webcast event. Company retains ownership of the software. Customers are not granted any rights to the software. They are sold the ability to run events which Company hosts.

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. For all of these reasons, the Department concludes that the fee for the software is exempt.

Company's product appears to be a service under 45 IAC 2.2-4-2, and not a sale, lease, license, or other transfer of software or other tangible personal property. Additionally, the product would not meet the definition of a "telecommunication service," which again is defined in IC 6-2.5-1-27.5 as "electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points." Company is transmitting, conveying, or routing information; however, "telecommunication services" does not include "[d]ata processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser whose primary purpose for the underlying transaction is the processed data or information," which is what Company's service performs.

Customers pay an annual subscription fee, which allows them to run a number of events per the "subscription year." The "Master Service Agreement" goes on to state that "[a]ny additional Events, Minutes, Attendees, On-demand Access or other Services ordered by Client shall be billed monthly at the rate set forth in the Fee Schedule." The "Master Service Agreement" does contain separately stated charges, but they all appear to be for services.

Based on the information provided, the product is not subject to sales or use tax, as it is a service and does not constitute or include sales of tangible personal property, specified digital products, prewritten computer software, or telecommunication services.

Company's product is a service as enumerated in 45 IAC 2.2-4-2, and it is not a "telecommunication service." Therefore, Company's' service is not subject to Indiana sales and use tax.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.