Taxing the Cloud – What Are The Issues For Sellers And Purchasers?

TaxConnections Picture - Connecting To Cloud ConceptIt is likely that most businesses today are using a cloud platform in one way or another.  Most commonly, they are doing this via remote access to software and/or hardware. There are a number of benefits to using cloud platforms.  However, cloud computing provides vendors and purchasers alike with a variety of taxability issues.  As cloud computing is a relatively new phenomenon, it has eclipsed outdated sales and use tax laws, resulting in uncertainty on how to tax such products. In this blog post, we’ll cover a few of the general issues that arise when determining the tax treatment of cloud computing.

The biggest hurdle in taxing the cloud is that there is not much legal clarity on the subject.  In looking at the precedent set by states, tax authorities have generally not provided enough guidance to aid tax professionals in determining the proper tax treatment.

One area that creates challenges is the sourcing of cloud transactions.  When determining how to source and characterize a cloud transaction for sales and use tax purposes, states will generally take one of two different approaches.  They will either source the transaction to the location of the cloud provider’s server or to the location of the end-user which they consider where the benefit is received.  From a sales tax perspective, the concepts of destination and benefit are not easily applied to digital items.  A seller of cloud products and services may have no idea where the receipt takes place, or where the item is used. From a purchaser perspective, location of use may not always be known – or may be from multiple locations.  For an example, consider electronically delivered software.  Is “use” of the product at the server location or at the user’s location(s)?

For an example, consider electronically delivered software.  Is “use” of the product at the server location or at the user’s location(s)?  Alabama has previously ruled that use is taking place at the server location.  New York has ruled that it takes place at the user’s location.  Pennsylvania previously said server location, but there has been a new change in policy to user location.  We’ve generally seen a trend towards user location, but watch out for states that include software or digital products in their definition of tangible personal property. These states may take a more traditional view of where these items should be sourced – one location.  When sourcing cloud transactions, one should take into consideration whether the product being purchased is downloaded and used at the purchaser’s location or connected to remotely via the seller’s server.

For another example, consider how remote storage (backup) of data could be sourced. Is “use” at the location where the data is stored as a backup?  Or is “use” at the location of the user who will retrieve the data? Another possibility is that “use” is at the location where the equipment is located on which the original data exists.

To learn more about these and other issues related to Cloud Computing, the Sales Tax Institute will be presenting the “How States Tax the Cloud” webinar on August 7.  This session will be taught by Carolynn Iafrate Kranz from Industry Sales Tax Solutions.  Carolynn will be covering the above issues in more detail as well as the different approaches employed by the states in taxing cloud computing.  For more details, please click here.

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