Weekly Round-Up: Revenue Departments' Cloudy Minds Lead to Inappropriate Assessments on Cloud Computing Services

Several state revenue departments are taking approaches that are clearly inconsistent with their state laws to reach conclusions that cloud computing services are subject to tax, Arthur R. Rosen, Leah Robinson and Hayes R. Holderness, all with McDermott Will & Emery LLP, write in this week's issue of the Bloomberg BNA Weekly State Tax Report.  

The state revenue departments of Arizona, Indiana, Massachusetts, Michigan, New York, Pennsylvania, Utah, and Vermont-and a state appellate court in Colorado-have determined that obtaining a service from the cloud amounts to obtaining constructive possession of the prewritten (or "canned") software that resides on the service provider's own server, the authors write.

The relevant state tax statutes, while not identical, have very similar goals, the authors explain. Arizona imposes a transaction privilege tax on any transfer of possession of tangible personal property. Indiana imposes a gross retail sales tax on transfer of possession or control of tangible personal property, and Massachusetts imposes sales tax on any transfer of possession of tangible personal property. 

Michigan imposes sales and use tax on the proceeds of transfers of ownership of tangible personal property, while New York imposes sales tax on receipts from transfers of possession of tangible personal property. Pennsylvania imposes sales tax upon each transfer of the possession of tangible personal property. Utah imposes sales tax on any transaction under which right to possession of tangible personal property is granted, and Vermont imposes its sales tax on any transfer of possession of tangible personal property.

Finally, the local sales tax ordinance at issue in the Colorado Court of Appeals decision imposes sales tax on any transfer of possession of tangible personal property. 

Thus, under the laws at issue, taxability rests on whether there has been a transfer of possession of tangible personal property. Because prewritten software is considered tangible personal property in these states, the central, and hotly disputed, issue in determining the taxability of the cloud computing services is whether the purchaser really has the degree of control over the software necessary to constitute possession as intended by the relevant sales and use tax statutes, the authors write. But many state revenue departments are failing to follow, or even consider, relevant state laws and the court decisions analyzing those laws.

The complete article by Rosen, Robinson and Holderness, which analyzes the approaches by revenue departments in Arizona, Colorado, Indiana and Massachusetts, toward the classification of cloud computing for sales and use tax purposes, is available in this week's issue of the Bloomberg BNA Weekly State Tax Report.

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Compiled by Priya D. Nair
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