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September 24, 2014
Practitioners Highlight State Guidance on Taxability of Cloud Computing
by Amy Hamilton

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Several states within recent months have published administrative guidance on the taxability of cloud computing services, while two states have adopted statutory language or regulations addressing the matter, prominent attorneys said September 22.

At the Institute for Professionals in Taxation's Sales Tax Symposium in Washington, Arthur Rosen of McDermott Will & Emery and Mark Eidman of Ryan Law Firm LLP highlighted several top issues in the field of sales and use taxation, including the status of state taxation of cloud computing services.

Rosen noted that effective July 1, Idaho law exempts from the definition of tangible personal property "computer software delivered electronically" and "remotely accessed computer software." (Idaho Code section 63-3616(b), as modified by enactment of H 598.)

In June the Missouri Department of Revenue published revised rules saying that the sale of software as a service is not subject to tax, he said.

There are pending regulatory changes in two states: The Idaho State Tax Commission in July released its second draft of proposed revisions to its cloud computing sales tax rule to reflect changes made by the new law, while in Vermont comments are due October 1 on draft regulations seeking to clarify the application of sales tax on prewritten software accessed remotely.

Rosen said state revenue departments are increasingly taking the position that a vendor providing a customer remote access to software constitutes a taxable transfer of "constructive possession" of that canned software.

"However, the states are wrong," Rosen said.

In February an administrative law judge in the New York Division of Tax Appeals held in Matter of SunGard Securities Finance LLC that SunGard was exempt from sales tax on cloud computing services because it provided an information service that is personal and individual to the customer. The New York State Department of Taxation and Finance on August 5 issued guidance (TB-ST-128) summarizing how sales tax applies to sales of computer software and related services.

Auto-Owners Insurance Co. v. Dep't of Treasury, a Michigan Court of Claims case decided in March, is an example of a court finding that access to third-party technical infrastructure via the cloud is not subject to use tax, Rosen said.

Rosen and Eidman provided a list of nine more states that have recently issued administrative guidance on the taxability of cloud computing services. Two have found the services taxable:

  • Under Ohio guidance dated February 4 (Tax Commissioner Opinion 14-0001), cloud-based communications services are subject to sales tax.
  • Under Utah guidance dated December 4, 2013 (Private Letter Ruling 13-003), a technology solutions provider's sales of a cloud-based service offering to customers in the state are taxable, but out-of-state purchases of hardware and software necessary to provide the service are not.

Rosen listed seven states that have issued administrative guidance finding that cloud computing is not taxable.
  • Under Florida guidance dated March 13 (Technical Assistance Advisement 14A19-001), infrastructure as a service is not subject to tax.
  • Under Georgia guidance dated February 20 (letter ruling SUT No. 2014-02-20-01), remote access to software is not subject to tax.
  • Under Massachusetts guidance dated February 10 (Letter Ruling 14-1), a database subscription -- a software as a service transaction -- was for nontaxable services, not the transfer of prewritten software, and is not subject to sales tax.
  • Under Tennessee guidance dated October 4 (Letter Ruling 13-12), cloud computing services are not subject to tax.
  • Under South Carolina guidance dated August 26 (Private Letter Ruling 14-2), usage fees charged for uploading, downloading, or moving data are not subject to tax on communication services.
  • Virginia guidance dated March 20 (Document 14-42) confirms the revenue department's earlier position that cloud computing is not subject to tax.
  • Under Wyoming guidance dated July 1 (Bulletin: Computer Sales and Services), the three main service models in cloud computing -- software as a service, platform as a service, and infrastructure as a service -- are not subject to tax.

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