By Sandy Weinberg
It is no surprise that state tax departments are scrambling to define their positions regarding sales taxation of cloud computing software and services. States often are behind the curve when trying to keep up with market or technology changes. For example, as the U.S. began shifting to a service economy, sales tax laws, originally addressing tangible personal property sales, lagged behind in providing guidance regarding the sales of services. Many states”™ lists of taxable services are still being updated.
States are now forming positions regarding the sales tax treatment of cloud computing, and not all states agree. Generally, cloud computing occurs when customers use software that is hosted by a seller that owns, operates, and maintains the software. The software is not transferred (through tangible or digital media) to the buyer as it is typically housed on the seller”™s servers. Customers do not have the right to download, copy, or modify the software. Rather, they merely receive access to the software.
New Jersey and New York are far apart with respect to sales and use-tax treatment of cloud computing sales.
New Jersey generally defines taxable tangible personal property to include prewritten software delivered electronically. However, the New Jersey Division of Taxation stated that because a retailer does not transfer any software to its customers, cloud computing transactions do not fit within New Jersey”™s definition of tangible personal property or enumerated taxable service. (N.J. Division of Taxation Tech. Bulletin TB-72 July 3, 2013). As a result, New Jersey does not impose sales tax on cloud computing sales.
New York, on the other hand, treats cloud computing transactions differently. The New York Department of Taxation and Finance issued an advisory opinion that cloud computing sales are taxable licenses to remotely use prewritten software. (N.Y. Department of Taxation and Finance, TSB-A-11(17)S (June 1, 2011). In short, it appears that New York subjects cloud computing sales to sales tax.
However, a position may exist that a particular transaction is not subject to sales tax in New York. First, cloud computing services are not enumerated taxable services. Therefore, the question becomes whether the taxpayer is paying for a software license or a service. Second, New York tax law requires that there be a transfer of possession or control for a customer to receive a taxable license of software. As a result, a position exists that many cloud computing transactions do not transfer the needed possession or control, and are not subject to New York sales tax. Therefore, taxpayers may want to negotiate a slightly different cloud computing agreement or scrutinize their cloud computing transactions in greater detail prior to conceding that all cloud computing sales are subject to New York sales tax.
In a number of states, as in New York, the facts at issue may change a conclusion since a particular transaction may not fit squarely within, or without, the state”™s published guidance.
Sandy Weinberg is a principal of O”™Connor Davies L.L.P. and leads the firm”™s state and local tax practice, as well as the tax credit and incentive practice. He can be reached at sweinberg@odpkf.com or (203) 323-2400.
Interesting post and another excellent highlight of the broad range of issues that need to be examined and addressed when utilizing cloud based services (whether IaaS, PaaS or SaaS offerings) above and beyond the more commonly recognized concerns of contracting, liability allocation, breach notification, HIPAA and other legal/infosec matters I address separately.
This is good point that lot of issue in cloud computing but yes need to remove these kind of errors.Data security is main issue in cloud computing as server is not fixed at any particular area so data is available globally so it’s better to don’t move right now on cloud computing some of these errors if overcome then it is best solution to avoid human errors.
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