In a recent letter ruling, the Indiana Department of Revenue (DOR) reversed portions of a sales and use tax audit assessment against a construction company operating in Indiana. The DOR had determined the company owed use tax on specific transactions and imposed a 10% penalty. The company argued that its purchases were made on behalf of an exempt customer and should be exempt.
The audit covered the 2021–2022 tax years and used a sampling method to estimate use tax liability. The proposed assessment was based on insufficient documentation showing that the company paid sales or use tax. The taxpayer protested, and the matter proceeded to an administrative hearing.
At the hearing, the company provided documentation showing that software purchased from Foundation, Smartsheet, Dodge Construction, Dropbox, and Microsoft was non-taxable Software as a Service (SaaS). Product descriptions confirmed cloud-based access via web browser, and an affidavit stated the company did not download the software onto their computers. The Department accepted this and reduced the use tax liability.
The taxpayer also demonstrated that the company had properly taxed prior transactions, including one that involved a fee paid to a governmental agency, not a retail transaction. The Department agreed and further reduced the liability. Finally, the taxpayer requested a waiver of the 10% negligence penalty, citing a minimal error rate and the fact that this was a first-time penalty. Additionally, the company hired an accounting firm to improve record-keeping processes to reduce future liabilities. The Department waived the penalty.
This case highlights the importance of maintaining accurate documentation, understanding SaaS taxability, and proactively addressing compliance. It also shows that penalties may be waived when taxpayers demonstrate good faith efforts to correct errors. (Indiana Department of State Revenue Letter of Findings 04-20251093, dated August 27, 2025)