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Cloud Computing: State Tax Opportunities and Pitfalls in the Forecast for Hottest Tech Trend



Thursday, December 1, 2011
Product Code - TMA64
Speaker(s): Steven N.J. Wlodychak, Mark N. Stefan, and Mauricio G. Keene, Ernst & Young LLP
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Cloud computing technologies have increasingly become the answer for companies looking to minimize information technology costs and gain more customers. Many businesses are harnessing the power of the cloud by offering “software as a service” applications (SaaS), which allow multiple users to remotely access software via the internet.

In these types of arrangements, customers are often required to pay to for the right to use software that could be used to perform functions such as accounting, customer relations, or cross-department collaboration. Upgrades or maintenance to the software are generally made to one master program without any additional charge to the customer.

The substantial revenues generated by cloud computing transactions also have caught the attention of states that are struggling to close massive budget deficits. The result is that state tax auditors are aggressively pursuing additional revenues by asserting new interpretations or applications of laws that often pre-date the advent of cloud computing.

Without a standard methodology in place for determining the tax treatment of cloud computing transactions across the various states, both the vendors and buyers of SaaS must navigate a daunting patchwork of conflicting state laws and administrative pronouncements.

The presentation will focus on the state tax planning opportunities and pitfalls related to cloud computing. It aims to better equip businesses and practitioners to anticipate the potential areas of conflict over these transactions and to more accurately gauge state tax compliance obligations.

Presentation Objectives
The objectives of this 90-minute audio discussion include providing participants with a conceptual understanding and practical application of the following:

  • The states’ varied approaches to classifying SaaS as a service or tangible personal property and the impact this determination has on cloud computing transactions from both a sales and use tax and income tax standpoint.
  • A framework for determining which party to a cloud computing transaction is subject to tax.
  • Key parts of a cloud computing agreement that could impact how the transaction will be taxed.
  • A methodology for determining the “true object” of a cloud computing transaction that involves both a service and the transfer of tangible personal property.
  • The different approaches that various states are using to impose sales or use tax on cloud computing arrangements.
  • An understanding of how cloud computing transactions involving multiple jurisdictions are “sourced” to each state, including the method set forth in the Streamlined Sales and Use Tax Agreement
  • An overview of state approaches to allocating or apportioning income from cloud computing transactions.

Upon completion of this program, participants will be able to:

  • identify the jurisdictions that treat access to software via the internet as a service or the exchange of tangible personal property,
  • evaluate the likely effect that key contract terms with have on cloud computing transactions
  • take appropriate action to minimize any tax exposure, and
  • consider alternative business arrangements to contain potential tax liabilities.

Steven N.J. Wlodychak, Mark N. Stefan, and Mauricio G. Keene, Ernst & Young LLP

Mark Stefan, Indirect Tax Partner with more than 17 years of experience in the state and local tax area. Mr. Stefan has extensive experience addressing sales and use tax transactions and related compliance functions for the high tech industry. He has also been active in developing custom compliance strategies for the proper accrual of use tax with substantial experience leading state and local tax engagements in a variety of industries, including assisting clients through planning, nexus studies, due diligence reviews, FAS analysis, process streamlining, compliance, reverse audits, audit defense and controversy, claims for refunds and managed audits in a majority of states. He co-authored “Sales Tax Considerations With Regard to Bundling in the Clouds,” Journal of Multistate Taxation and Incentives, August 2011, and has helped clients recover tens of millions of dollars in tax through refunds and reductions in audit assessments. Prior to his move into public accounting, Mr. Stefan worked as an auditor for the California State Board of Equalization. MS in Taxation, Golden Gate University; BA in Business Economics, University of California at Santa Barbara, CPA in California, and Certified Management Accountant.

Mauricio Keene, Indirect Tax Senior Manager, with more than 17 years of experience in the sales and use tax and telecommunications tax area. Mr. Keene specializes in multistate sales and use tax services, including assisting clients with transaction tax advice and tax automation/streamlining and audits for clients with a focus on software and technology, and telecommunications. He co-authored “Sales Tax Considerations With Regard to Bundling in the Clouds,” Journal of Multistate Taxation and Incentives, August 2011, and is a frequent speaker on state and local tax issues including a number of cloud computing workshops and events such as the Tax Executives Institute, and various client workshops. Prior to joining the Firm in March 2001, he was Corporate Tax Manager for SBC Communications (formerly Pacific Telesis Group) responsible for federal, state and local tax compliance with respect to sales, use and other excise taxes. Prior to his SBC experience, Mr. Keene served as Business Taxes Supervisor with the California State Board of Equalization. BS in Business Administration and Finance from California Polytechnic State University at San Luis Obispo, member of the Institute for Professionals in Taxation (IPT) and is a Certified Member of the Institute (CMI) for sales and use tax.

Steve Wlodychak is a Principal with Ernst & Young LLP’s Transaction Advisory Services/State and Local Tax group. Based in Los Angeles, Steve focuses on the state and local tax treatment of mergers and acquisitions and reorganizations, as well as state and local tax bankruptcy and restructuring practice.