State Tax Snapshot: States Differ in Characterizing, Sourcing Cloud-Computing Receipts


States differ in the manner in which they characterize and source receipts arising from fees paid by in-state customers to access an out-of-state corporation's software via a third-party's cloud infrastructure, according to the Bloomberg BNA 2012 Survey of State Tax Departments.

In the recently released survey, we asked the states how they characterize and source receipts from in-state customers that access an out-of-state corporation's software via a third-party's cloud infrastructure. The receipts from such transactions are characterized as "other than tangible personal property" and sourced according to the cost of performance method, 10 states said (Arizona, Hawaii, Missouri, Nebraska, New Mexico, North Dakota, Oregon, Tennessee, Virginia, and West Virginia).

Nine other states also said they characterize the receipts as "other than tangible property," but use a market-based sourcing method in which the in-state customers' receipts are added to the numerator of the corporation's sales factor to the extent that the customers used the software within the jurisdiction. These states were Alabama, Florida, Georgia, Iowa, Kentucky, Maine, Rhode Island, Utah, and Wisconsin.

"In the states that believe these transactions are something other than tangible, an ancillary characterization issue arises because such a conclusion begs the question of whether these transactions should be sourced as sales of: services, personal services, or intangibles," said Jamie Yesnowitz, a senior manager with Grant Thornton LLP in Washington, D.C.

Characterizing the receipts from cloud-based transactions as sales arising from "tangible personal property" are Colorado, Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia.

In addition to the differences between states as to how to tax cloud computing transactions, there are inconsistencies within states. States are struggling with whether to harmonize the income tax and sales tax treatment of software, said Jeff Friedman a partner with Sutherland in Washington, D.C. For example, Colorado sources cloud receipts as tangible personal property for income tax purposes, but the state enacted legislation last year that removes canned software from the definition of "tangible personal property" used for sales tax purposes, Friedman said. "Dated and arbitrary distinctions between tangible property, intangible property, and services arrived at for sales tax purposes often should not apply for income tax purposes," he said.

Additional expert analysis of the results will be presented in a May 17 webinar by Fred Nicely, tax counsel for the Council On State Taxation (COST), and Thomas Shimkin, director of the Multistate Tax Commission's National Nexus Program.

By Steven Roll

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