States continue to take a checkerboard approach in determining whether sales tax applies to cloud computing, according to a panel of experts at New York University's 31st Institute on State and Local Taxation, and only recently have buyers, more so than sellers, expressed an interest in the tax consequences of cloud computing issues.
From a technological perspective, cloud computing typically falls into three categories: (1) access to software, (2) access to platforms, and (3) access to infrastructure.
Yet, according to Arthur R. Rosen, a partner at McDermott Will & Emory LLP in New York, many states will tax such access as either:
• a sale or license of software,
• an information or data processing service, or
• a digital product or enumerated digital service.
One result is that “with [cloud computing] products it's more likely than normal that the vendor won't collect the right amount of tax,” said James W. Wetzler, director of the Mulitstate Tax Group for Deloitte Tax LLP in New York.
The panelists identified the various approaches that some states have adopted for determining whether to exempt or tax certain types of cloud computing transactions.
Many states determine their tax treatment of cloud computing based on the policies they established for taxing software, the panelists said. In the following states, access to software from the Internet is treated as a taxable sale or license of prewritten software:
• New York: Advisory Opinion Nos., TSB-A-09(19)S (May 21, 2009); TSB-A-10(2)S (Jan. 20, 2010); TSB-A- 10(44)S (Sept. 22, 2010); TSB-A-11(17)S (June 1, 2011) (online services taxable as sale of pre-written software).
• Colorado: Ball Aerospace & Technologies Corp. v. City of Boulder, No. 11CA2129 (Colo. Ct. App., Sept. 13, 2012) (remote access to online service providers' software is taxable use of computer software under the City of Boulder Code).
• Pennsylvania: Letter Ruling No. SUT-12-001 (May 31, 2012) (fees for remote access to software taxable if purchased software is used by in-state customer).
• Utah: Private Letter Ruling No. 10-001 (Feb. 24, 2012) (fees for remotely accessed pre-written software taxable if purchased software is used by the customer in Utah).
Other states, the panelists noted, include web-based applications within the definition of prewritten software, but do not subject it to tax. These states include:
• Iowa: Policy Letter No. 12300002 (Jan. 11, 2012) (hosted software and related training services were not taxable).
• Kansas: Opinion Letter No. O-2012-001 (Feb. 6, 2012) (charges for hosted software services are not taxable as sales of prewritten computer software).
• Missouri: Letter Ruling LR6991 (Jan. 27, 2012) (access to non-downloadable software housed on vendor's website on servers out-of-state not taxable).
• Tennessee: Revenue Ruling No. 11-22 (June 10, 2011) (fee for access to software ASP not taxable); Letter Rulings No. 11-58 (Oct. 10, 2011) (fee for access to software housed outside of state not taxable; no transfer of possession or control).
Some states classify cloud computing transactions as a service, the panelists noted. These states include:
• South Carolina: Revenue Ruling No. 03-5 (Dec. 9, 2003) (reinstated by Revenue Ruling 11-2) (“charges by the [ASP] are similar to charges by database access services and are therefore subject to [tax]”).
• Texas: Comptroller's Letter Ruling No. 201207533L (July 31, 2012) (various cloud computing services taxable as data processing services).
Nontaxable examples of cloud computing classified as a service have been seen in:
• Colorado: Private Letter Ruling 11-007 (Dec. 20, 2011) (charges for digital filing services using a hosted software application not taxable).
• Missouri: Letter Ruling LR6941 (Oct. 20, 2011) (subscription to online educational website not a taxable enumerated service).
• Rhode Island: Ruling Request No. 2011-01 (March 4, 2012) (digital certificate authentication and resolution services not taxable because no tangible personal property is transferred).
• Virginia: Ruling of the Commissioner P.D. 12-2 (Jan. 19, 2012) (digital certificate authentication and resolution services not taxable because no tangible personal property is transferred).
Vermont and Washington include some types of cloud computing transactions within the definition of taxable data processing services:
• Vermont: H.B. 782 temporarily suspends (until July 1, 2013) taxation of remotely accessed prewritten software and allows for refunds of taxes already paid.
• Washington: Wash. Rev. Code § 82.08.020(1)(b) (sales tax on “digital automated service'' defined as “any service transferred electronically that uses one or more software applications'' under Wash. Rev. Code § 82.04.192(3)(a)).
By Steven Roll
Copyright 2012, The Bureau of National Affairs, Inc.