NOTICE: IC § 4-22-7-7 permits the publication of this document in the Indiana Register. The publication of this document provides the general public with information about the Indiana Department of Revenue's official position concerning a specific set of facts and issues. The "Holding" section is provided for the convenience of the reader and is not part of the analysis contained in this document.

Indiana Company provided sufficient documentation to show it is entitled to a refund of sales tax.

I. Sales and Use Tax–Software.

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 § 6-2.5-4-16.4; 45 IAC 2.2-1-1; 45 IAC 2.2-4-2.

Taxpayer protests the Department's refund denial.

Taxpayer is a corporation with locations in Indiana. Taxpayer requested a refund of sales tax. The Indiana Department of Revenue ("Department") denied Taxpayer's refund request in part because Taxpayer did not provide documentation to support its position. Taxpayer protested the partial denial and an administrative hearing was held. This Memorandum of Decision ensues, and additional facts will be provided as requested.

I. Sales and Use Tax–Software.

Taxpayer is part of a group of companies that perform diagnostic medical testing. Taxpayer provides software interface services between its related companies ("Related") that actually perform the testing and the various doctors ("Doctors") who requested the testing. This software interface service allows the software used by Doctors to interact and communicate with the software used by Related.

In order to provide these software interface services, Taxpayer paid two third-party software vendors ("Vendors") used by Doctors for the right to access their software platforms. In other words, Vendors charged Taxpayer for the right to interact with Vendors' software. Vendors charged sales tax on those transactions and Taxpayer claimed a refund of that sales tax. The Department denied this portion of the refund claim on the basis that Taxpayer had not established that it was paying for access to software and not for ownership of software. In the course of the protest process, Taxpayer provided documentation including software agreements with Vendors which it believes established that it only paid for access to and not ownership of the software.

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:

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."

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:

After review of the supporting documentation supplied in the protest process, the highlighted vendors do not appear to transfer any "prewritten computer software." The interface software is never transferred to Taxpayer or the medical facilities. Taxpayer utilizes its own software, the medical facilities utilize their own systems, and the vendors do not transfer any software to Taxpayer. Neither Taxpayer nor any medical facility has the right to access, control, or use the interface software, nor do they ever hold title in the interface software. Thus, Taxpayer only purchased access to the Vendor's software without the rights to manipulate or control the software.

Taxpayer's purchases appear to be of 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 purchase 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." Vendors are transmitting, conveying, or routing information; however, "telecommunication services" do 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 the third parties' interface services perform.

Based on the information provided, the transactions at issue are not the purchase of tangible personal property, prewritten computer software, or telecommunication services. Rather, these transactions are only for the right to access Vendor's software. Thus, Taxpayer is entitled to the refund of sales tax from the two protested vendors.

Taxpayer's protest is sustained.

February 26, 2020