US Indiana Sales Tax on SaaS, Software and Digital Products

Background

Indiana’s current position is relatively favourable for SaaS and remotely accessed cloud tools, but less favourable for downloaded software and certain permanently transferred digital products.

Indiana imposes sales tax on retail transactions involving tangible personal property, certain enumerated services, and certain electronically transferred digital products. Indiana Sales Tax Information Bulletin states that computer hardware is generally taxable, but software taxability depends on whether the software is custom or prewritten, and transactions involving remotely accessed computer software are not subject to sales tax.

Indiana Sales Tax Framework 

Indiana treats prewritten computer software as tangible personal property. Tangible personal property includes prewritten computer software, and defines prewritten software as software not designed and developed to the specifications of a specific purchaser.

However, Indiana’s software framework draws a very important distinction between:

1. Downloaded or physically delivered prewritten software, which is generally taxable.
2. Remotely accessed software, which is generally not treated as a retail transaction and therefore is generally not taxable.

This distinction is central for SaaS and cloud providers.

Canned or Prewritten Software

Canned software, also called commercial off-the-shelf software or prewritten software, is taxable in Indiana when sold or leased in tangible form, such as on a disk, USB drive, or other tangible medium. Prewritten programs developed for sale, rental, lease, or license on the general market and sold or leased in tangible form are subject to Indiana sales tax.

Indiana also taxes electronically downloaded prewritten software. Prewritten software downloaded by Indiana customers, whether sold, rented, leased, or licensed for consideration, is subject to Indiana sales or use tax. This includes downloaded mobile apps where consideration is charged.

How this statutory provision translates in a real-life tax scenario: 

A foreign software company sells a downloadable accounting software licence to an Indiana customer for USD 2,000. The software is prewritten and downloaded to the customer’s device. If the provider has Indiana collection responsibility, the provider should collect Indiana sales tax at 7%. If the provider does not collect, the Indiana purchaser may owe use tax.

Custom Software

Indiana generally does not tax custom software designed specifically for one purchaser. Transactions involving computer software in the form of a custom programme specifically designed for the purchaser are not subject to Indiana sales or use tax.

Indiana also has a specific rule for modifications of prewritten software. If prewritten software is modified or enhanced for a specific purchaser, the underlying software remains prewritten software. However, where there is a reasonable, separately stated charge for the modification or enhancement, that modification charge is treated as a non-taxable service and not as prewritten computer software.

SaaS and Remotely Accessed Software

Indiana’s current SaaS position is clear and favourable compared with states such as New York, Texas, or DC.

Prewritten computer software sold, rented, leased, or licensed for consideration and remotely accessed over the internet, private or public networks, or wireless media is not considered an electronic transfer of computer software and is not considered a retail transaction. 

Cloud access to the hosted software, without downloading software to the user’s computer, is not subject to Indiana sales or use tax.

This means that ordinary SaaS, where the customer only receives remote access to software hosted by the provider, is generally not taxable in Indiana.

How this statutory provision translates in a real-life tax scenario: 

A Lithuanian SaaS provider sells access to a cloud-based CRM to an Indiana company. The customer logs in through a browser and does not download the provider’s software, except perhaps a free access app. Under Indiana’s current guidance, the subscription is generally not subject to Indiana sales tax.

Downloaded access software, and the 10% Incidental Rule

Indiana’s SaaS treatment becomes more complex where the customer downloads an app, applet, connector, or agent.

To have a clearer picture of this provision and taxability requirements, let’s think about this case scenario: Service provider performs IT functions, and the customer downloads a small applet that supports the provider’s remote service. If the downloaded software is incidental, meaning less than 10 percent of the total transaction price, the overall service transaction may remain exempt.

However, if the app or applet is acquired for consideration in a separate transaction and allows access to remotely accessed software, the app or applet itself is subject to sales tax because it is electronically delivered.

How this statutory provision translates in a real-life tax scenario: 

Foreign SaaS providers should identify whether customers download any paid software component. A free app used only to access remotely hosted software is less problematic. A paid downloadable desktop client, app, or connector can create a taxable software element.

IaaS and PaaS

Indiana generally does not tax IaaS where the customer is not buying, renting, or leasing the provider’s equipment. IaaS transaction is not taxable if the customer is not purchasing, renting, or leasing the equipment.

PaaS usually involves hardware and software in one product. If hardware is leased or purchased by the customer, PaaS is not subject to Indiana sales or use tax if the hardware is incidental, meaning less than 10 percent of the total purchase price, to the remotely accessed software transaction, or if the customer is not purchasing, renting, or leasing the hardware. The taxpayer bears the burden of proving how hardware was used, what control or possession the purchaser had, the object of the transaction, and any ownership rights.

Digital Products

Indiana is more limited than some states in taxing digital products. Indiana imposes sales and use tax on electronically transferred products only if they are specified digital products, prewritten software, or telecommunications services.

Specified digital products include digital audio works, digital audiovisual works, and digital books. Indiana taxes specified digital products where they are electronically transferred to an end user, and the end user receives a right of permanent use that is not conditioned on continued payment. Digital codes are taxed in the same way as the product they allow the buyer to obtain.

This is important for subscriptions. A streaming subscription or temporary access model may not be taxed in the same way as a permanent download if the statutory permanent use requirement is not met.

Generative AI and Recent Department Rulings

Indiana has issued recent guidance that supports the non-taxable treatment of remote access digital services where no software or permanent digital product is transferred.

Revenue Ruling No. 2025 02 RST concluded that customer access to a generative AI chatbot was not subject to Indiana sales and use tax because the offering was a service and not a transfer of software or specified digital products. The same summary notes that the service was delivered entirely through remote access and customers did not acquire a permanent right to a digital product or ownership of software.

Remote Seller Threshold and Registration Obligation

Indiana applies an economic nexus threshold to remote sellers. Effective January 1, 2024, Indiana has only the USD 100,000 gross revenue threshold. 

The USD 100,000 threshold applies regardless of whether any of that revenue was generated by taxable sales. It also states that wholesalers are considered retail merchants, so a remote vendor may be required to register and file returns even if it believes none of its sales are taxable.

How this statutory provision translates in a real-life tax scenario: 

A foreign SaaS provider whose Indiana revenue exceeds USD 100,000 may need to register and file even if its ordinary SaaS subscriptions are ultimately non-taxable. The seller should then report exempt or non-taxable sales properly rather than simply ignoring Indiana registration.

Collection and Remittance 

Local sellers

Indiana sellers making taxable retail transactions should collect Indiana sales tax from customers and remit it to DOR. 

Remote sellers

A remote seller without Indiana physical presence should collect and remit tax if it exceeds the USD 100,000 Indiana gross revenue threshold and makes taxable Indiana transactions.

Marketplace facilitators

Marketplace facilitators are treated as the retail merchant for third-party marketplace sales. DOR states that a seller making sales only through a marketplace facilitator is not required to register and file Indiana sales tax returns, and that a marketplace seller with its own registration should report marketplace sales as exempt sales on ST 103.

Marketplace facilitators are required to register if Indiana gross revenue exceeds USD 100,000, including sales not subject to tax or considered exempt, during the prior or current calendar year.

Purchasers

Where Indiana sales tax is not collected on a taxable purchase used in Indiana, the purchaser generally owes Indiana use tax. Indiana’s use tax is complementary to sales tax and is imposed at 7%.

There is no general “purchaser threshold” that eliminates use tax. If the purchase is taxable and no equivalent tax was paid, use tax is due.

B2C and B2B treatment

Indiana sales and use tax is not limited to B2C transactions. It applies to taxable retail transactions, whether the purchaser is an individual consumer or a business.

However, B2B transactions often involve exemption documentation. Remote sellers are required to obtain either Indiana Form ST 105 or the Streamlined Sales Tax Agreement Certificate of Exemption from purchasers eligible for exemption.

A local Indiana business with a sales tax registration number is not automatically exempt. If the business buys taxable downloaded prewritten software for internal use, the remote provider should collect Indiana tax if it has collection responsibility, unless the buyer provides a valid exemption certificate.

How this statutory provision translates in a real-life tax scenario: 

A remote provider of digital services does not need to charge Indiana sales tax on ordinary non-taxable SaaS or remotely accessed software, even for B2B customers. However, it does need to charge Indiana sales tax on taxable products, such as downloaded prewritten software, paid downloaded apps, or taxable specified digital products, where the provider has nexus and the Indiana business buyer does not provide a valid exemption certificate. Being a local sales tax registered business does not itself make the buyer exempt.

Final Remarks

Indiana’s current framework is relatively clear. Downloaded prewritten software, tangible media software, and paid downloaded apps are generally taxable. Custom software, ordinary SaaS, remotely accessed software, many IaaS and PaaS arrangements, and online database access are generally not taxable if no taxable software or permanent digital product is transferred.

Remote and foreign providers should monitor Indiana gross revenue. Once revenue from Indiana sales exceeds USD 100,000 in the current or prior calendar year, the provider may need to register and file. If the provider sells taxable downloaded software or taxable specified digital products, it should collect Indiana sales tax at 7% unless a valid exemption certificate applies. 

If the provider sells only non-taxable SaaS but exceeds the threshold, registration and return filing may still be required because the threshold applies regardless of whether the revenue was from taxable sales.

Frequently Asked Questions