The Indiana Department of State Revenue (Department) has reiterated in its Letter of Findings 04-20130306 (Finding) the Department’s position that computer software sales are generally not subject to Indiana sales and use tax if the software is a custom program specifically designed for one purchaser. Pre-written computer software programs, even if the program requires some modification for a purchaser’s particular computer, are subject to Indiana sales and use tax. In addition, the Department also determined that GPS units installed on vehicles sold to consumers were subject to use tax when not separately itemized on invoices or separately bargained for in the transaction.
Custom or pre-written computer software
In this Finding, the taxpayer, an Indiana car dealership, was audited in 2010 and 2011. As part of such audit, the examiner determined that the taxpayer owed use tax on the purchase of internet-based information platforms and computer software programs used in its business because the taxpayer had failed to pay sales tax on such purchases.
The Department determined after a hearing that the taxpayer had not substantiated its claim that the purchase of the Internet-based information platforms and computer software programs represented the purchase of a service and not the purchase of tangible personal property subject to sales and use tax. The Department determined that the invoices the taxpayer provided to evidence its purchase of a service were either not sufficiently detailed to explain the underlying transaction or clearly demonstrated that the taxpayer purchased pre-written computer software. Consequently, the Department found that such purchases were subject to use tax.
GPS units subject to sales and use taxes
As part of this Finding, the Department also analyzed whether GPS units the taxpayer had installed on its customers’ vehicles, as a requirement of financing such vehicles, were subject to sales and use tax. The purpose of the GPS units was to permit the taxpayer to locate and repossess the vehicles if the customers defaulted on their car payments.
The taxpayer tried to argue that the GPS units were eligible for the sale for resale exemption from Indiana sales and use tax because the GPS units were installed and sold with the vehicle. The Indiana sale for resale exemption applies to exempt a sale from sales and use tax if the person acquiring the property acquires it for resale, rental or leasing in the ordinary course of such person’s business without changing the form of such property.
The Department explained that Indiana courts have found that the sale for resale exemption is only available if the taxpayer is able to demonstrate that it received itemized consideration for the item. In addition, Indiana courts have also provided that separate bargaining must occur between the customer and the taxpayer regarding that particular item.
In the Finding, the Department determined the taxpayer had failed to show it was selling the GPS units separately from the vehicles by listing the GPS units on the invoice for separate consideration. In addition, the Department stated that the taxpayer had not demonstrated that there was any separate bargaining for the GPS units. Consequently, the taxpayer’s purchase of the GPS units were subject to use tax because the taxpayer did not pay sales tax at the time of its purchase of the GPS units
The importance of substantiation
In this Finding, the Department ruled against the taxpayer because the taxpayer could not provide sufficiently detailed or itemized invoices to substantiate its arguments for why sales and use tax should not apply to its transactions. Therefore, this Finding clearly demonstrates how important it is to understand how local sales and use tax rules apply to your business so you can maximize your ability to be eligible for various local sales and use tax exemptions.