As cloud computing grows, states will continue to issue updated and new policy statements, procedures, enact legislation and promulgate new rules and regulations on the taxability of such transactions. It is important that a company review its state tax positions and keep abreast of any new developments regarding the taxation of cloud computing. Companies should continue to watch for any new developments and any additional guidance with regard to the taxability of such cloud computing transactions.
Companies should be aware of the complexity and changing nature of the state sales and use tax treatment regarding the three different types of cloud computing transactions: Software as a Service, Platform as a Service, and Infrastructure as a Service.
Under a SaaS model, the consumer can use the SaaS provider’s software applications or databases that are running on a cloud infrastructure. The applications are accessible over the Internet from various client devices. This can be a web browser, or a program interface. The consumer does not manage or control the network hardware or servers where the software or database is located. The network hardware or servers are owned by the SaaS providers.
SaaS or similar model can include the following:
Many states have determined that SaaS is a sale of software. Therefore, using software by electronically accessing it is the same as electronically downloading it; where the user has no proprietary rights to the software. Other states have taken the position that the SaaS is a data processing service, computer service, or other service; because no software is transferred. Finally, in some states, SaaS taxability will be addressed on a case-by-case basis in a letter ruling based on the specific facts of the transaction in order to determine what the intent or main purpose of the transaction is. Often this intent or main purpose of the transaction is referred to as the “true object”. This could be the use of software, the receipt of software, or some other intent.
Below are various examples that demonstrate how taxability of SaaS transactions varies by state:
Under a PaaS model, the consumer can use the PaaS provider’s platform and software application development tools that run on a cloud infrastructure. The consumer does not have to install hardware or software to develop or run new applications. The consumer does not manage or control the PaaS cloud hardware and software components. The consumer does manage the applications and services that they develop.
Below are various examples that demonstrate how taxability of PaaS transactions varies by state:
Under an IaaS model, the consumer can use the IaaS provider’s computing resources such as servers, processing, storage, networks, and other fundamental computing resources. The consumer is able to deploy and run arbitrary software, which can include operating systems and applications. The consumer does not manage or control the IaaS cloud hardware and software components. The consumer does manage their own software, operating systems, and applications.
Below are various examples that demonstrate how taxability of IaaS transactions varies by state:
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