Sales Tax Slice: New Cloud Computing Section Highlights Upcoming Bloomberg BNA 2014 Survey of State Tax Departments


In recent years, cloud computing has emerged as a conundrum for state tax departments and practitioners alike. In the past, businesses would typically provide software purchases via tangible personal property (i.e. hard diskette, compact disc). As the Internet evolved, businesses began delivering the software electronically, with the purchaser downloading it to their hard drive. With cloud computing, however, users can access the software remotely via a remote server without having to download. This allows the user to access the software from any location, at any time, and on an as-needed basis.

However, problems arise over how these services fit within the existing state tax framework. Does the software access reach a sufficient threshold to create nexus with the user’s home state? Are the services provided even taxable in the home state? Because cloud computing is a relatively new innovation, many states have failed to keep with the technology. Accordingly, practitioners are often forced to look to existing statutes and guidance to see whether there is a possibility that the laws can be interpreted broadly enough to cover this innovation.

Recognizing such uncertainty, Bloomberg BNA has included a new cloud computing section to its Survey of State Tax Departments, an annual special report in which BBNA asks state revenue officials a series of questions aimed at providing clarity and transparency to the gray areas of state tax law. This year’s survey, which will be published on April 25, addresses the growing concerns over whether certain cloud computing activity will create nexus in the user’s home state.

Specifically, the survey asks revenue officials whether the following activities will create nexus:

  1. The out-of-state corporation charges fees to in-state customers for the right to access non-downloadable prewritten software that is hosted on a server in another state.
  2. The out-of-state corporation charges fees to in-state customers for the right to access non-downloadable prewritten software that is hosted on a server in another state and remotely performs a taxable service in your state.
  3. The out-of-state corporation sends an employee to your state to perform an initial setup and then charges fees to in-state customers for the right to access non-downloadable prewritten software that is hosted on a server in another state.
  4. The out-of-state corporation sends hires an independent contractor in your state to provide training to in-state customers and charges fees to in-state customers for the right to access non-downloadable prewritten software that is hosted on a server in another state.
  5. The out-of-state corporation charges fees to in-state customers for the right to access non-downloadable prewritten software that is hosted on a server in another state and occasionally (e.g. one to 11 times per year) has employees meet with customers in your state.
  6. The out-of-state corporation charges fees to in-state customers for the right to access non-downloadable prewritten software that is hosted on a server in another state and regularly (e.g. 12 times or more per year) has employees meet with customers in your state.

The survey section is split into 2 parts: the first part being the six questions listed above and the second part being the same six questions, but with the term “information on its website” replacing the term “non-downloadable prewritten software.

At first glance, the results are somewhat varied and indicative of an emerging business innovation. Indeed, it would be hard to ignore the number of “Not Applicable” and “No Response” answers – “Not Applicable” would indicate that the charges are nontaxable in the respective state and “No Response” means that the state chose not to answer that particular question in the survey.

While it may be difficult to glean any discernible trends from some responses, it is fairly obvious that the states’ positions on the potentially nexus-creating activities seem to turn on particular facts and circumstances.

For instance, the results would indicate that a state is much more likely to find nexus when a human being (i.e. an employee or independent contractor) performs an in-state service associated with the cloud product as opposed to a user simply accessing software via out-of-state servers.

Since the issue of applying sales taxes to cloud computing is still in its relative infancy, it’s safe to assume that it will have a place on future surveys. As state revenue departments continue to fine-tune or update their statutes and guidance or defend their positions against taxpayers in court, it’s also safe to assume that the 2024 survey will look significantly different than it does today. Just how different is anyone’s guess.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: What will the cloud computing portion of the survey look like in 5 years? 10 years? 

Responses to the Bloomberg BNA 2014 Survey of State Tax Departments will be incorporated into Bloomberg BNA’s Nexus Tools, which helps users assess the nexus implications of most types of business activities in 50 U.S. states, Washington D.C., and New York City. Sign up for a free 7-day trial of Bloomberg BNA’s State Tax Nexus Tools here.

Sign up for afree trialof the Bloomberg BNA Premier State Tax Library and see a detailed discussion on state sales and use taxes. 

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