Corporate Close Up: Cloudy without a Chance of Clarity? States Using Disparate Approaches for Sourcing Receipts from Cloud Computing


For the first time, the Bloomberg BNA Survey of State Tax Departments asked the states to identify what method they use to source receipts from cloud computing or software as a service (SaaS) transactions. Eighteen states said that they use market-based sourcing, 10 states reported that they use cost of performance and six states indicated that they use a sourcing method other than cost of performance or market-based sourcing. That leaves 14 jurisdictions that did not provide an answer at all, meaning some jurisdictions are still up in the air when it comes to sourcing receipts from these transactions.

The following states indicated they use the cost of performance sourcing method for receipts from these transactions: Colorado, Kansas, Kentucky, Missouri, Montana, New Mexico, North Dakota, Oregon, Vermont, and Virginia.

Jurisdictions indicating they use the market-based sourcing method include: Alabama, the District of Columbia, Florida, Illinois, Indiana, Iowa, Maine, Massachusetts, Minnesota, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, Tennessee, Utah, West Virginia, and Wisconsin. However, some of these states, despite answering affirmatively, stated that the sourcing is fact specific, or that they are still in the process of developing a position on these transactions.

California, Delaware, Maryland, Michigan, Ohio, and Texas indicated they use a sourcing method other than cost of performance or market-based. California and Maryland did not provide additional information on what alternative sourcing method they use. Michigan referenced Auto-Owners Insurance Co. v. Dept. of Treas., a case which discusses the implications of online services for use tax purposes, not corporate income tax. Delaware, Ohio, and Texas indicated that the sourcing depends on the facts underlying the transaction.

The majority of jurisdictions said they have no position on sourcing these transactions, do not use any of the methods listed, or simply did not respond at all. These states are: Alaska, Arizona, Arkansas, Connecticut, Georgia, Hawaii, Idaho, Louisiana, New Hampshire, New York, New York City, North Carolina, South Carolina, and Oklahoma.

Unfortunately, the states have made one thing clear – that for most, their position for sourcing receipts from cloud computing and SaaS transactions is anything but definite. Many responses came with disclaimers which only added to the murkiness, or worse, with no explanation at all. For now, taxpayers in many states are left with hazy guidance and a forecast without much clarity in sight.

Continue the discussion on LinkedIn: Which method should be used to source receipts from cloud computing transactions?

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