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Completely Compliance: Taxability of Cloud Computing

by DMA Staff | Nov 05, 2015
The issue surrounding the taxability of cloud computing has become a hot topic recently. There are many questions, issues, and complexities that have left states and businesses scratching their heads. As technology enables internet sales to compete with, if not surpass, brick and mortar stores, the traditional definition of nexus is in question. Cloud computing is the latest in a series of technology issues which are leaving states scrambling to determine taxability.

Many states focus their attention on Software as a Service (SaaS). These are generally programs which are centrally located and require a subscription for online access; however, the end user does not purchase or own the software. There is also Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). These two allow for the subscriber to have more control and develop various other technologies within their cloud programs.Google Compute Engine (IaaS) and Google App Engine (PaaS) are examples.

The State of Vermont recently passed legislation stating that software accessed remotely will not be subject to sales tax. Act 51, Sec. G.8, was effective July 1, 2015. It is the latest legislation passed regarding the matter. Some states, such as Arkansas, California, Florida, Georgia, Oklahoma and Wyoming, have already passed legislation determining SaaS to be a nontaxable service. Other states claim it as exempt with some provisions.

Per 35.IV.5.06, Mississippi exempts any software that is maintained on servers outside of the state.
Use Tax. Section 27-67-3(i), defines computer software programs as tangible personal property for use tax purposes. The regular rate of use tax is due and payable from every person using, storing, or consuming such property within this state, possession of which is acquired in any manner. However, software maintained on a server located outside the state and accessible for use only via the Internet is not taxable. (Page 51) REFERENCE

Tennessee follows Mississippi but also includes the SaaS as taxable if sold as a bundled transaction.

The monthly ASP (Application Software Provider) fee charged to Tennessee customers is not subject to Tennessee sales tax unless the fee is bundled (combined) with the sale of a taxable product or taxable service. (Page 4) REFERENCE

In Rhode Island, prewritten software is considered exempt if it is accessed remotely and not downloaded.

When an agreement exists for a vendor to host software from their equipment and may be accessed by a customer, the transaction is not considered prewritten computer software delivered electronically and therefore is not subject to tax, provided there is no downloading of prewritten computer software. (Rule 7) REFERENCE

The majority of states who consider SaaS taxable do so because of regulations in their states which tax data processing services or electronically transferred software. These states include Connecticut, District of Columbia, Hawaii, New Mexico and Texas. As with the exempt states, there are always some additions or exceptions to the rule. For example, Massachusetts and Ohio apply the true object test to the transaction.

Please do not hesitate to contact your local DMA office should you have specific questions or requests.

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