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.

Maryland Puts Focus on Computer Science

One of the Indiana Chamber’s top legislative priorities for 2018 is to increase computer science (CS) requirements for K-12 students. In Maryland, several similar initiatives are taking place.

Governor Larry Hogan kicked off “Achieving Computer Science Collaborations for Employing Students Statewide” (ACCESS) just a few months after signing on for Governors for Computer Science, a partnership of state leaders that have committed to increasing access to K-12 CS education.

By executive order and proposed legislation, the governor hopes to improve job readiness for graduates and draw a more diversified workforce to computing jobs.

Currently, according to the governor’s office, Maryland has 115,000 CS-related jobs in-state, with almost 20,000 openings. Demand for CS workers is expected to grow by another 12 percent over the next decade. Yet, state colleges and universities graduated fewer than 3,000 CS majors in 2015, just a fifth of whom were female.

Maryland is home to several cyber-related federal government agencies and military installations, including the National Security Agency, the U.S. Cyber Command and the National Cybersecurity Center of Excellence. The state has 1,200 private sector cybersecurity companies. And 17 Maryland universities, colleges and community colleges have been designated as national centers of academic excellence in cyber defense.

Governor Hogan’s Executive Order requested that the state’s Task Force on Cybersecurity and Information Technology study the development of pathways that meet targeted workforce needs in computing fields and identify new ways to promote gender and minority equity in the STEM and IT workforce. A report on the findings will be due in June 2018.

The governor also announced that he would support legislation during the 2018 General Assembly session to implement computer science standards statewide for K-12 students. The administration said it would work with the state’s teachers as well representatives from higher education and computer science organizations to develop those.

Additionally, the governor will be allocating $5 million to fund teacher professional development in CS and offer grants to districts and schools to create training models and equipment.

The governor also said his office would team up with Girls Who Code to launch the challenge, which would promote partnerships among state and local leaders, school districts, community organizations and industry to launch new clubs statewide. These clubs offer free after-school programs that allow female students in grades 6-12 grade to learn and apply CS to help their communities with the support of peers and role models.