In Revenue Ruling #2018-03ST (Oct. 29, 2018) (published Dec. 26, 2018), an out-of-state corporation (“Company”) sought an opinion as to whether sales tax should be collected for subscription fees charged for access to an online information database.

Company maintains an online database available to customers who pay a subscription fee. The subscription provides the customer (usually a student) with study guides, suggestions to improve writing, and access to essays and papers written by previous students in order to help the customer’s own writing. Nothing can be downloaded.

A retail transaction subject to sales tax is defined in Indiana Code § 6-2.5-4-1(b) as the transfer, in the ordinary course of business, of tangible personal property for consideration. Under Indiana Code § 6-2.5-1-27, “tangible property” expressly includes “prewritten computer software.” The Department of Revenue noted that even though Indiana is a signatory to the Streamlined Sales and Use Tax Agreement ("SSUTA"), the SSUTA does not prohibit the imposition of sales tax on prewritten computer software.

The Department of Revenue noted that the use of Company’s online database necessarily involves the use of prewritten computer software, which is computer software that is not designed and developed by the author or other creator to the specifications of a specific purchaser. See Ind. Code § 6-2.5-1-24.

However, effective July 1, 2018, Indiana Code § 6-2.5-4-16.7 provides that a “transaction in which an end user purchases, rents, leases, or licenses the right to remotely access prewritten computer software over the Internet, over private or public networks, or through wireless media,” is not considered to be the delivery of prewritten computer software and is not considered a retail transaction. Thus, the Department of Revenue concluded that because the software component of Company's service offering is remotely accessed, a fee for Company's website services would not be subject to Indiana sales or use taxes pursuant to Indiana Code § 6-2.5-4-16.7:  “In other words, after June 30, 2018, transactions for prewritten computer software remotely accessed from a hosted computer or server or through a pool of shared resources from multiple computers and servers, without having to download the software to the user's computer, are not considered retail transactions, and therefore the purchase, rental, lease, or license of that software is not subject to Indiana sales or use tax.”

Additionally, the Department of Revenue noted its longstanding policy that access to an online database service on its own is not subject to sales tax, citing Revenue Ruling 2011-05ST, (Dec. 9, 2011).

In evaluating Company’s other offerings besides prewritten computer software, the Department of Revenue looked to Indiana Code § 6-2.5-4-16.4(b), which 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.

Because the customers cannot download and permanently use the textbooks and other resources that might qualify as specified digital products, the Department of Revenue concluded it would not be considered a taxable transaction under Indiana Code § 6-2.5-4-16.4(b).

Finally, the Department of Revenue concluded that a total combined charge for the provision of services, remotely accessed software, and specified digital products that are not for permanent use would not be considered a unitary transaction, nor a "bundled transaction" under Indiana Code § 6-2.5-1-11.5, because, as of July 1, 2018, all individual components were either exempt or otherwise not subject to sales tax.

This Ruling provides certainty concerning the Department’s position that providing access to online software that does not allow for downloading is not a retail transaction for Indiana sales tax purposes. For companies that provide online access with downloading capability, this Ruling suggests that where a fee for online access is separate and distinct from the fee charged for downloading, the Department may consider that the online access fee is not subject to sales tax.