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.

Short Session Starts With a Flurry of Activity

The Governor and General Assembly have continually heard from Hoosier employers on the need for a skilled workforce – and better aligning state programs with job demand. The good news is bills are being introduced to address those concerns. While only a handful of measures have been released to date, we are seeing legislation related to training tax credits and grants, as well as efforts to streamline current workforce programs. We anticipate a comprehensive workforce bill (1002) will be introduced in the House later next week.

The Governor’s computer science bill (SB 172) requires all public schools to offer a one-semester elective computer science course at least once each school year to high school students. We expect a hearing on this measure in the next two weeks. Both this and the workforce efforts are 2018 Indiana Chamber legislative priorities.

Senate Bill 257 has been introduced by Sen. Travis Holdman (R-Markle) to serve as the beginning of discussions on clarifying the exempt status of computer software sold as a service (SaaS) – a Chamber priority. Holdman is also authoring another major piece of tax legislation, SB 242, which contains a variety of tax matters. The House bills are coming in too, with a good number already filed addressing local tax issues.

Speaking of local matters, the Chamber is very pleased to see that the House Republican agenda includes a bill that will make township government more effective and efficient by the merging of townships (approximately 300) where less than 1,200 people reside. Such local government reform has been a longstanding Chamber goal.

In addition to SB 257, other technology-related bills include Rep. Ed Soliday’s (R-Valparaiso) autonomous vehicle (AV) proposal to position Indiana to safely test and implement AV technology with automobiles. The bill also will address truck platooning, which uses GPS and WiFi technology to allow trucks to more closely follow each other for greater efficiency, on Indiana roads.

Rural broadband, high-speed internet and small cell wireless structures technology all will be topics for the Legislature to debate. Certified technology parks also will be discussed with the idea to have an additional capture of sales and income tax revenue for those complexes that perform well.

In health care, enabling employers to ask prospective employees if they are smokers not only heads the Chamber’s wish list but also appears to be gaining traction this go-round. Eliminating the special protections (currently in state statute) for smokers is found in SB 23 and will be guided by Sen. Liz Brown (R-Fort Wayne). The bill has a pretty good chance of getting a hearing in the Senate – which would be a first. Previously, a measure was taken up in a joint hearing in the House.

Increasing the tobacco tax and raising the legal age for smokers to 21 are policies that likely will be included in a bill to be introduced by Rep. Charlie Brown (D-Gary). The Indiana Chamber is supportive of both.

Nine utility-related bills are on our radar screen at this point. They range from tweaks of last year’s big legislation (like SB 309, which addressed rising energy costs and a long-standing struggle between the investor-owned electric utilities and larger consumers of energy) to compulsory sewer connection, excavation for infrastructure, regulation of solar energy systems in homeowners’ associations and new water legislation. Separately, Sen. David Niezgodski (D-South Bend) has a proposed ban on coal tar pavement sealer, which we oppose.

There are also a number of bills proposing changes to Indiana’s alcohol laws including: Sunday sales, cold beer sales by grocery and convenience stores, and increases in fees and penalties.

The Chamber will be providing more details on all of these bills as the session progresses.

For anyone who wants a refresher about how legislation becomes law, the Chamber has a handy guide free of charge. It includes a diagram of the bill process, a glossary of often-used terms and a look at where bills commonly get tripped up.

Additionally, the Chamber will be providing updates and issuing pertinent documents throughout the session at www.indianachamber.com/legislative.

Tech Talk: Life After Unicorns

Editor’s note: Author Christian Beck is principal design partner at Innovatemap. This is excerpted from a more extensive post on “5 Trends Transforming the World of Venture Capital.” 

As a designer with no formal business training, I could be the last person qualified to write about the world of venture capital (VC). However, over the last several years of working with dozens of start-ups seeking seed funding and scale-ups pitching for Series A, I’ve taken it upon myself to learn the language.

To learn more about investing, I highly recommend Neil Murray’s newsletter, Series F. But for those start-ups trying to get a handle on macro-level trends in the world of VC, I am going to share how I see it from an outsider’s perspective.

One helpful piece of context is that my VC education is driven largely by witnessing first-hand how these firms work in the Midwest, contrasting with what I read from the SF-area firms. As with most things tech, Silicon Valley is the most mature market and often provides a glimpse of the future for other emerging markets. It’s also true that emerging markets can learn from the missteps of those pioneers and chart different paths.

I’ve been following a few trends in venture capital that I think are exciting and possibly transformative. One of those is zebras.

“Zebra” is a term created to contrast the unicorn, which has typically referred to companies valued at $1 billion or more. Zebras represent companies that are profitable, sustainable, and beneficial to society. As I’ve been digging into this trend, I can see the need to insert a new metaphor in the start-up world.

zebra

Unicorns are being chased at all costs, and it’s had a negative effect on entrepreneurs. What may start as an idealistic passion to change the world can easily get bastardized into chasing user acquisition, monthly recurring revenue (MRR) and hockey stick growth … at any cost.

At the heart of this is the notion that VC firms are chasing 10x returns. I’m no financial analyst, but that seems a bit like overkill. You might want to be Lebron, but if you could settle with playing in the NBA, you’d probably be just as happy.

And that’s what is really behind the Zebra trend: a reality check that every start-up doesn’t need to be a unicorn. Indie.vc proves this with a long list of companies they fund and other companies that have scaled based on revenue rather than funding (also note how simple their own web site is: the zebra mentality is carried through top to bottom).

It’s not that becoming a unicorn is inherently bad, but the mentality to get there can create a series of bad decisions that lead to failed products like the Juicero – a SaaS-based juice start-up – when simply making a better juicer would’ve been sufficient.

What it means for the Midwest

The Zebra trend is particularly relatable to Midwest tech hubs that are trying to evolve older industries like agriculture and manufacturing. Creating unicorns is less attractive than creating strong companies with the goal of establishing a healthy local economy. Pumping start-ups with cash in hopes of a 10x return may be fun in the short-term, but it doesn’t provide long-term stability and healthy growth.

Ultimately, tech products should solve problems, but businesses should help local economies. Nowhere is this more pronounced than the Rust Belt. Here, it’s less important to roll the dice on unicorns and more important to establish strong companies that strengthen local economies. As the Rust Belt continues to emerge as a key player in the tech industry, this trend will become the norm.

Takeaways for start-ups

Focus on jobs over profits: Maybe it’s just the Heartland in me, but I tend to believe that while tech companies can service customers around the world, they can still have a local impact. The Fortune 500 is full of companies that grew slowly, created long-term value for investors and provided amazing places to work. Tech doesn’t need to be different. SaaS products can still grow by focusing on employees as much as they do their profits.

Set realistic revenue targets: The path to healthy growth starts with realistic targets. Given enough time and creativity, every start-up can plot a path to unicorn-land and often VC’s may feel the same way. But setting realistic expectations early on will lead to better product decisions down the road. Ultimately, you may find that early on you might have more revenue-based growth opportunity than you realize and wait to take on more investment (if at all).

Tech Talk: Moving Ahead on the Policy Front

2017 Tech Policy Summit

The discussions at the second Indiana Technology & Innovation Policy Summit last Friday were so plentiful and rich with content that three stages were utilized during the five-hour event. Seven sessions and a keynote address were part of the mix.

We’ll hit a few highlights below, but an overall takeaway: Our state has momentum, there is more work to do to continue that positive pace and one way for tech and innovation business leaders to get involved and help ensure success is communicating with your legislators. It’s a critical component.

In the words of the presenters:

  • Fishers Mayor Scott Fadness: Indiana can largely check the box on enhancing its tax and business climate; today is about the innovation climate and building bridges between traditional industries and technology companies. And he says the IoT lab coming to Fishers will send a powerful message about aggregating talent.
  • Software-as-a-Service: The legislative mission is to provide “certainty and predictability to the tech community” about SaaS and tax treatment. Three states (Washington, Tennessee and Pennsylvania) have put up red lights on software development by taxing SaaS. Indiana seeks to join a similar number with a green light encouraging investment. Christopher Day of DemandJump: “It’s not just about SaaS. What it’s about is growing our wealth as a state. It’s time to transition the Crossroads of America to the Nation’s Nucleus.” SaaS panel
  • Certified Technology Parks: Fifteen of 23 tech parks in the state have met the $5 million funding cap. The proposal is to allow those parks that meet certification requirements to be eligible for additional funds to continue to provide technical assistance to companies within the facilities.
  • Larry Gigerich, Ginovus, on expanding investment capital: Twenty states have tax credits that are transferable, sellable or bondable with eight or nine more set to consider such action. Indiana is missing from that equation, its 20% tax credit is no longer competitive against many other states and the state’s cap is “middle of the pack.” Although the Next Level Fund approved in 2017 will be helpful, Gigerich gives preference to a stronger tax credit system.
  • Autonomous vehicles (AV): State Rep. Ed Soliday presented extensive data. Again, Indiana is looking to join other states (21 with legislation, five with executive orders) with some form of policy. Indiana’s goals: ensure public safety and encourage innovation/AV research and development in our state. Soliday says much work needs to be done to convince the public about the benefits.
  • Data centers: Rich Carlton of Data Realty didn’t argue with the general assertion that data centers themselves don’t create large numbers of jobs, but cited the related development and job creation that has taken place in South Bend. Tax treatment is preventing Indiana from being a participant in the national data center boom. A $2 million data center building with an additional $23 million in equipment would be taxed at the first figure in many states, but at $25 million in Indiana. Carlton: “Do we want to have part of something or all of nothing?”

Jeff Brantley, Indiana Chamber vice president of political affairs, connected the dots on legislative victories resulting from both political and policy involvement from the business community.

Micah Vincent, director of the Indiana Office of Management and Budget, shared that we can expect to see the initial Next Level Fund investments in the first quarter of 2018. And he projected that the 2018 Indiana General Assembly may very well end up being the “workforce session.”

Check out the two-page summary of how the legislative positions of the Chamber’s Tech Policy Committee can impact the state’s economic future. Look for continued coverage of these important issues through various Chamber communications.

Tech Talk: Innovation Policy Takes Center Stage

Fact: Indiana is enjoying success in attracting and growing technology and innovation businesses.

Next step: What public policies can help continue that momentum?

Find out during the Indiana Technology and Innovation Policy Summit on December 1 at the Conrad Indianapolis.

tech summit

Influential industry, government and legislative leaders will highlight policy priorities during morning sessions. Micah Vincent, director of the Indiana Office of Management and Budget, will deliver the luncheon keynote.

This year’s summit builds on the successful 2017 legislative session when a number of key issues supported by the Indiana Chamber became law.

Among the legislative priorities to be featured during this year’s summit:

  • Autonomous Vehicles – Find out about the opportunity for Indiana to engage in and capitalize on the growing interest and work done in autonomous vehicle research and programs. State Rep. Ed Soliday will lead the discussion.
  • Software-as-a-Service (SaaS) and tax implications – Indiana ranks second in software job growth. It’s important to clarify the tax situation for SaaS companies so Indiana remains competitive with other states.
  • Data Centers – With the economy increasingly dependent on data, hosting data centers is an economic growth opportunity for Indiana. Rich Carlton, president and COO of Data Realty in South Bend, will talk about fundamental changes the state needs to make to attract data center facilities.

Fisher Mayor Scott Fadness will discuss Smart Cities, Smart State initiatives and the future of certified technology parks will be analyzed. Ted Baker of the Muncie Innovation Center and Karl LaPan of the Northeast Indiana Innovation Center are presenting.

Registration and a continental breakfast start at 8 a.m. The summit begins at 8:30 a.m. and concludes at 1:30 p.m. View the complete agenda.

Registration is $95 for Indiana Chamber members and $125 for non-members. For more information, visit the event page.

Event sponsors are Smithville, the Digital Policy Institute and Purdue University. Additional sponsorship opportunities are available by contacting Jim Wagner.