Supreme Court Rules in Favor of Online Sales Tax Collection; Indiana Poised to See Millions in New Revenue

The U.S. Supreme Court decision issued yesterday in South Dakota v. Wayfair has been awaited by many brick-and-mortar retailers and state budget-makers for over 25 years. In a nutshell, the Supreme Court’s decision (5-4) will permit states to move forward with sales tax collection from online retailers.

The Court overturned the Quill v. North Dakota decision (and Bellas Hess on which Quill was based) dealing with sales tax on mail orders – dating back to 1992, well before the internet boom. The Court found those old decisions to be “unsound and incorrect” and deemed them to be “an extraordinary imposition by the judiciary on states’ authority to collect taxes and perform critical public functions.” The old cases found that requiring the collection of sales tax, when the seller has no physical presence in the state, an undue burden on interstate commerce – a constitutional issue. The “physical presence” test effectively prohibited states from requiring an out-of-state business to collect sales tax from its customers. But now the Court has stated that it “can no longer support the prohibition of a valid exercise of states’ sovereign power”. To put it simply, times have changed. There is readily available software that online retailers can utilize to set up the sales tax collection; it’s no longer a big deal. Separately, the online retail market has become so huge in the last two-plus decades as consumer shopping preferences have shifted; that’s made it all the more imperative that the segment be on a level playing field tax-wise with brick-and-mortar stores.

The Court also addressed the widely-held notion that this issue needed to be resolved by Congress. The Court responded to that saying, “It is inconsistent with this Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation.”  In other words, the Court created this dilemma, if you will, with the Quill case and determined it needed to be the one to then provide a remedy.

The new ruling essentially upholds the South Dakota statute that allowed the state to require online sellers to collect sales tax if they deliver over $100,000 in goods into the state, or have over 200 separate transactions with customers in the state. (Technically, the case was remanded to the South Dakota Supreme Court to issue a new determination without the Quill case serving as a controlling precedent.) The Court found that the requirement under other precedent – that the seller have legal nexus in the state – was clearly met by the sales thresholds of the South Dakota Act.

The Indiana Chamber has been a long-time advocate for online sales tax collection; it is one of the key goals in our Indiana Vision 2025 plan. State lawmakers, led by former Sen. Luke Kenley, were also attuned to these issues and quite wisely enacted legislation in 2017 that was modeled after the South Dakota statute. In fact, our law is essentially identical. This means that with a law that the U.S. Supreme Court has now found legally sufficient, Indiana is poised to begin requiring online sellers to collect and remit Indiana sales tax from their Indiana customers. Again, this is directed at those online sellers who meet the $100,000 or 200 transaction thresholds outlined above.

 It is worth mentioning that Hoosiers are already legally obligated to pay the online sales tax when they file their state income tax returns, but as a practical matter almost nobody does. Uncollected sales tax from online transactions has resulted in substantial loss of revenue to states, thus increasing the tax burden on those who do pay the taxes they owe. Estimates place the uncollected tax for the state of Indiana at more than $100 million annually, perhaps as high as $200 million. That number has grown exponentially with the popularity of online shopping and is only going to keep rising.

So here’s to the U.S. Supreme Court for rectifying this long-standing problem, leveling the playing field between businesses and placing the sales tax burden evenly.

Victory! Software-as-a-Service Bill Set to Become Law

This week, the Senate unanimously approved the House changes to Senate Bill 257 (Sales Tax on Software). This bill began as a top Indiana Chamber goal; it was embraced by the administration and made a priority of the Governor, the Senate got it introduced and rolling, then the House took good legislation and made it even better.

The Senate concurrence vote means the bill is on its way to Gov. Holcomb and there will be SaaS (software as a service) tax clarity in Indiana!

This is exactly what the Indiana Chamber has been working toward since last summer and it is good news for the SaaS industry. Senate Bill 257 is a straightforward piece of legislation that can reap very real economic benefits for the state. We thank legislators for listening to our members and taking this important step forward to demonstrate Indiana’s commitment to embracing the growth of the SaaS industry. The legislation puts Indiana in a very favorable position to attract more and more of this burgeoning business to our state.

Key Workforce Development Legislation Still a Work-in-Progress

In the Indiana General Assembly, both House Bill 1002 and Senate Bill 50 have been significantly amended in ways that we support, but also in ways that give us some concern. We have strong support for the thoughtful and deliberate work on the study by the Legislative Service Agency of all workforce programs. It is extremely thorough and we look forward to the results of each year’s report and presentation. We also support the language regarding the Next Level Jobs Employer Training Grant program. The career and technical education (CTE) student information portal for local employers is a prime example of a creative model without having to spend extra capital. And we also support expanding the Employment Aid Readiness Network (EARN) Indiana program to include part-time students.

We hope to continue the conversation on the makeup of the Governor’s Workforce Cabinet in conference committee and have some questions as to how this will work in conjunction with the State Workforce Innovation Council (SWIC), a similar existing cabinet that is required to have its membership be 50% employers. We appreciate the language in the bill allowing the Indiana Chamber to be consulted with on a gubernatorial appointment for a business leader to the panel; however, we question why we cannot simply utilize the SWIC.

If we are tied to the idea of creating a new cabinet, we feel strongly that we should have more employer voices at the table, plus give the Indiana Chamber a seat as well. The Chamber’s place on the cabinet would provide historical knowledge on workforce issues, representing the voices of thousands of members and investors throughout the state and providing consistency when we have a new Governor who would make the majority of the appointees (be they employers or agency heads).

In close, though these bills are better and moving in the right direction, they still need work. The Chamber will continue to advocate for strong policies throughout conference committee.

Tech Talk: Making Progress at the Statehouse

An Indiana General Assembly analysis at the midway point of the session is always a bit tricky. We can tell you the current status of legislation, but with the caution that more negotiations, compromises and refinements are on the way.

Clarifying the tax status of software as a service (SaaS) is among the high-priority items. Bill Waltz, our tax policy expert, shares this insightful update:

Bill Waltz

As is often the case, the House and the Senate each have their own ideas on how best to address big issues. That is the current circumstance regarding the taxability of software utilized as the means of providing a service. Obtaining greater clarity on this subject is a priority of the Chamber and the Governor.

Senate Bill 257 embodies the efforts of the administration to clarify tax law in this arena. It was largely formulated by the Department of Revenue (DOR) and the Office of Management and Budget to serve as guidance for what is taxable and what is not. The bill is basically a codification of recent DOR rulings interpreting and applying its own information bulletin, which outlines a complicated set of factors and tests. The legislation is focused on what constitutes a retail transaction (sale) of a tangible good.

Essentially, the position of DOR is to tax the sale of prewritten off-the-shelf type software, including such software even if it is downloaded or accessed over the internet. But if it is customized software or software utilized in connection with what is primarily a service to a customer, it is omitted from the new statute and deemed not taxable.

The determinations in gray areas will remain fact sensitive, but the language is intended to make it clearer that software services are not taxable. The statutory provisions should operate to make people in the SaaS industry more comfortable in concluding that they do not need to collect sales tax, unless they are engaged in a transaction that falls squarely into the retail product sale category as set out in the legislation.

On the other hand, HB 1316 takes a different approach. It uses similar language as is in SB 257 but adds several unique twists to the picture. First, it creates a new lesser rate for prewritten off-the-shelf type of software – with the apparent objective of identifying and monitoring the tax revenues associated with these transactions. It excludes transactions where the software is acquired by a business to perform its core business purpose. This business-to-business exemption component is of course a very positive thing and should be embraced. Finally, it looks to the long term potential of sales involving software as the industry continues to expand, plus creates a trigger reducing the standard sales tax rate for when total collections exceed $250 million (a threshold so high that it is hardly foreseeable in the near future.)

Perhaps it makes the most sense to combine the good pieces of these competing bills to produce the best end result. The Chamber sees much merit in doing all that is possible to clarify the state of the law regarding SaaS as is addressed in the Senate bill. This is needed and would be a positive step. But while unique aspects of the House bill present some real concerns, it also includes the most solid of tax principles – don’t tax business inputs. Exempting business-to-business transactions would prove a terrific encouragement to the SaaS industry to conduct their businesses in Indiana.

In the second half of the session, the Chamber will be leading the charge to resolve the SaaS clarification issue to the fullest extent possible.

A variety of other tech policy priorities are still in play. Here is a brief summary.

Video: Midterm Evaluation of the Indiana General Assembly

Indiana Chamber President and CEO Kevin Brinegar provides a midterm evaluation of the 2018 Indiana General Assembly. Among the key bills that did not survive the first half of the session: raising the smoking age from 18 to 21 (a common-sense step for dealing with health care costs and lost productivity that causes more than $6 billion in annual impact). In addition, an effort to modernize the state’s local government system by consolidating the smallest townships was not brought for a vote.

Areas that are still a work in progress include reforming the state’s workforce development programs, incorporating computer science requirements into schools, clarifying tax treatment for Software-as-a-Service (SaaS) and continuing to move forward on long-term water resource management.

Legislation Favorable to Drug, Medical Device Manufacturers Passes Senate, Heads to President

Legislation which passed the Senate Thursday ensures that drug and medical devices can move to the market quicker. Manufacturers of these products would pay higher user fees and the revenue raised would help the U.S. Food and Drug Administration (FDA) review the items in a more expedited process. The law governing this process was set to expire by September 30, so it was imperative that the Senate act before members left for their August recess.

The legislation passed the Senate 94-1 with both Indiana senators supporting the legislation. The bill was not amended in the Senate and so therefore it now heads to the President for final signature.

The Indiana Chamber advocated for the passage of this bill during the Hoosiers Work for Health summit in July.

The legislation aligns with the Chamber’s legislative policy regarding the FDA: “The FDA has an important responsibility to make sure consumers get expeditious access to safe and effective products. Thus, the Indiana Chamber supports a well-resourced FDA, especially in the area of drugs and medical devices, through appropriated funds and user fees (tied to specific and measurable performance requirements for the FDA).”

Taxes and Public Finance: A Very Early Look at What We Are Following

We have yet to see the complete list of bills that have been introduced, and no bills having primarily to do with tax have yet been heard in committee. But of those that are available for viewing and assigned to committee, quite a few are worthy of note. They may or may not ultimately get a hearing, so it cannot be said that they are moving. Nevertheless, these bills are ones to keep an eye on.

Two measures will undoubtedly move through to the end of session – albeit with the expected/unexpected twists and turns. House Bill 1001 on the budget currently contains the Holcomb administration’s spending proposals – that is until the Ways and Means Committee has its way with it. Accompanying it will be HB 1002, the measure for long-term transportation funding (see Mark Lawrance’s infrastructure story).

There are the usual sales tax exemption and sales tax holiday bills, which historically have not been favored by the budget makers: HB 1063, HB 1111 and SB 53. There are many dealing with property tax assessment and property tax appeals, which could get some attention: HB 1046, HB 1056, HB 1105, HB 1198, HB 1229, HB 1299, SB 292, SB 331, SB 350 and SB 415. Meanwhile, SB 449 addresses how personal property tax audits can be funded; SB 308 would take heavy equipment that is rented off the property tax rolls and puts an excise tax on the rentals; HB 1247 creates a minimum property tax fee; and SB 342 revisits tax increment financing.

On the local tax front, HB 1129 keeps up the ongoing work on local option income (LOIT) taxes while HB 1096 grants broad authority to locals to adopt food and beverage taxes.

Interestingly, and unnecessarily, HB 1160 seeks a further study of the Tax Court (on top of the review conducted by the Supreme Court just last year.) Tax attorneys will be interested in SB 440 as it gets into some procedural issues.

This is just a small sampling of what has been filed. Once bills involving tax matters begin to make their way through the committees, we will report on those that are of consequence to the business community.

Chamber Celebrates Three Key Highlights of the 2012 Session

The 2012 legislative session should be remembered for far more than being the forum for Indiana becoming the 23rd right-to-work state, says Indiana Chamber President Kevin Brinegar.

"While right-to-work was deservedly the headliner, we finished with the passage of two impressive supporting acts: the statewide smoking ban and the inheritance tax elimination. Both have the potential to positively impact Hoosiers for generations to come," he offers
 
Details and specific comments from Brinegar on these three public policies:

Right-to-work for employees (HB 1001) – Prohibits unions from forcing Indiana workers to join or pay dues and fees to a labor union to get or keep a job in this state; makes it the employees’ choice. Does not eliminate unions or collective bargaining.

"With the passage of right-to-work, Indiana has further distinguished itself from neighboring states and given companies another big reason to bring their business and jobs here – and not there. In the five weeks since it passed, there has already been documented interest from several companies now putting Indiana at the top of the list for their business relocation or expansion."

Statewide smoking ban (HB 1149) – Prohibits smoking in the majority of workplaces (bars/taverns, gambling institutions are biggest exceptions), all restaurants and within eight feet of a building’s public entrance. Local governments may enact stricter ordinances.

"Smoking has direct financial ramifications for all businesses that offer health care insurance and the employees who are covered, not to mention the health implications for those non-smokers who unavoidably encounter second-hand smoke.

"Indiana will now protect 95% of Hoosiers while at work and also allow citizens to eat at a restaurant without having to encounter cigarette or cigar smoke. That is a huge positive development and legislators should be commended for coming together and taking that important step at this time."

Elimination of the state’s inheritance tax (SB 293) – Phases out the inheritance tax incrementally over a nine-year period beginning in 2013, with elimination of the tax complete in 2022. Also expands the more favorably-treated Class A category of inheritors and raises the inheritance amount (currently very low) that’s excluded from the tax; both provisions take effect this year.

"This tax only amounted to 1% of total state revenue but made things unnecessarily burdensome for so many Hoosiers. For a small family-owned business, the inheritance tax could be a tremendous hindrance to even continuing after the death of the owner."

Session in Review: Frustrating at Times, but Satisfying

Indiana Chamber President Kevin Brinegar wraps up the 2011 Legislative Session. While frustrations included the House Democratic exodus and lack of township reforms, he labels the session "overwhelmingly satisfying" due to positive education reforms, tax cuts and immigration reform that was not as punitive to businesses as it could have been.