BBNA asked state and local tax practitioners' for their opinions on whether purchases of cloud computing services should create nexus for either the purchaser or the seller. Now that several practitioners have provided their responses, the answer is a resounding, "Well, it raises a lot of questions," but an equally resounding, "No."
The majority of responders opined that in general, purchases of cloud computing services should not result in the purchaser having nexus with the seller's state. One responder reasoned that even the question of determining where the services originating from is not so straightforward, pointing out that the location of data stored on a seller's network of servers can change frequently, likely without the purchaser even knowing.
Other "no" responders focused on the physical presence requirement, arguing that purchasing cloud computing services does not necessarily demonstrate the purchaser's intent to establish a marketplace within a certain state, comparing the situation to one in which a business enters a state to negotiate a contract without creating nexus.
Conversely, from the seller's perspective, at least two survey responders reasoned that sellers should likewise not have nexus with a purchaser's state, unless the seller purposefully directs its activities to customers in that state. Another responder argued that the situation isn't so cut-and-dry-arguing that whether a seller has nexus with a purchaser's state depends on that state's specific nexus rules, such as whether the state follows the physical presence standard or an economic presence test.
Again, on the flip side, this same responder suggested that a purchaser's nexus with the seller's state likely depends on that state's treatment of cloud computing services; if the state considers such transactions to be sales of software, then the purchaser may be deemed to own property in that state, and thus have nexus with the state.
Additionally, one responder asserted that nexus should be based on a "business enterprise theory," under which the purchaser of cloud computing services would be subject to taxes in whatever state the cloud computing services are used to generate income. And lastly, one practitioner suggested that the problem may require uniform federal legislation to prevent taxpayers from facing double taxation as states take differing approaches to address the issue of nexus and taxation of income from cloud computing services.
By Michael Kerman
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