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Software in the Cloud: What are the Tax Implications?

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.

Software as a Service (SaaS)

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:

  • The ability to access software from a remote network or location.
  • The customer does not receive a copy of the software. (This includes electronic or in tangible form)
  • The seller always maintains both possession and control of the software.

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:

  • Arkansas:  Currently there is no specific authority that specifically addresses the taxability of SaaS.  However, software that is delivered electronically is exempt.
  • California:  SaaS is not a taxable service.  However, software or information that is delivered electronically is exempt. The ability to access software from a remote network or location is exempt.  Under California sales and use tax law, there must be a transfer of TPP, in order to have a taxable event.  There is normally no transfer of possession or control of TPP when SaaS is used.
  • District of Columbia:  SaaS is a taxable service.  Software or data that is delivered electronically and computer services are taxable.
  • Texas:  SaaS is a taxable service.  The Texas Comptroller of Public Accounts has ruled that charges for access to software through the Internet and transmitted data to out-of-state servers, which processed the data to prepare a tax return are taxable data processing services.

Platform as a Service (PaaS)

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:

  • Massachusetts:  PaaS is not a taxable service.  The Department of Revenue has ruled that charges for accessing platforms are exempt where the object of the transaction is only to acquire computing resources or storage capacity, and not the use of software.
  • New Jersey:  PaaS is a nontaxable sale of a service.  PaaS is not enumerated as a taxable service as long as TPP is not transferred in the transaction.
  • Virginia:  PaaS is a nontaxable sale of a service.  This exemption applies to any service that does not involve TPP in the transaction, and only provides access to or use of the Internet and any other related electronic communication service.  This includes software, data, content and other information services delivered electronically via the Internet.  Also the department of Taxation has issued several Commissioner Rulings which state that the providing of cloud based computer type services are not taxable because no TPP is furnished.
  • Vermont:  Currently there is no specific authority that specifically addresses the taxability of PaaS.  The Department of Taxes has issued a Fact Sheet that states that charges to remotely accessed computer software over the cloud and the use of the software is an exempt computer service or the sale of an intangible.

Infrastructure as a Service (IaaS)

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:

  • Massachusetts:  IaaS is not a taxable service.  The Department of Revenue has ruled that charges remote storage are exempt because the object of the transaction is not enumerated as a taxable.
  • New Jersey:  IaaS is not a taxable sale of TPP but a sales of a service.  IaaS is not enumerated as a taxable service.
  • South Dakota:  Currently there is no specific authority that specifically addresses the taxability of IaaS.  However, fees or charges for access to databases, networks, and access to computer systems are taxable.
  • Vermont:  Currently there is no specific authority that specifically addresses the taxability of IaaS.  The Department of Taxes has issued a Fact Sheet that states that charges to remotely accessed computer software and the use of the software is exempt.

 

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