New York Advises Sales of “Computing Power” Not Taxable

Yesterday, the New York Department of Taxation and Finance Office of Counsel issued advisory opinion TSB-A-15(2)S holding that cloud computing vendors providing “Internet infrastructure” were not subject to sales tax.  Taxpayer’s clients provided their own software to taxpayer, which ran that software for client’s purposes. Taxpayer provided hardware at data centers, including memory, processing, and storage, along with non-hardware components, such as operating systems, software development kits (SDKs), application programming interfaces (APIs), and client management consoles. Taxpayer charged an hourly rate based on the client’s hardware load and chosen operating system, along with a separately stated fee for data transfer. That business model is commonly referred to as “infrastructure as a service” (IaaS). 

Previously, New York has held that cloud computing vendors offering services were subject to sales tax because such services were transfers of the right to use prewritten software. See, e.g., TSB-A-10(28)S (2010), TSB-A-11(17)S (2011), and TSB-A-13(22)S (2013). That business model is commonly referred to as “software as a service” (SaaS) or “application service provider” (ASP).

However, in the instant case, New York applied the primary purpose test and determined the object of the sale was “computing power” rather than prewritten software. Although the state also found that the operating system constituted prewritten software, it further found that its transfer was an incidental part of the service and merely enabled clients to use the “computing power.” It concluded that “computing power” was not among the list of enumerated taxable services.

The state did not determine whether SDKs, APIs, or client management consoles constituted software.

Michigan Extends Nexus to Similarly Named Businesses

Recently, Michigan Governor Rick Snyder signed two bills that introduce affiliate and click-through nexus:

S.B. 658 (for sales tax) and S.B. 659 (for use tax).  The bills take effect October 1, 2015.  Michigan first considered affiliate nexus in 2011.

As we reported, most recently in December 2013, Michigan’s affiliate nexus provisions are similar to those of other states with one exception:  It extends the rebuttable presumption of nexus to one who “sells a similar line of products” as another seller with nexus and “does so under the same business name as the seller or a similar business name as the seller.”  This novel statutory language creates the threat of nexus by similar-sounding trade names.

Additionally, the new rebuttable presumption of click-through nexus applies to sellers annually earning more than $10,000 from in-state referral companies and more than $50,000 from in-state customers.

We will follow this legislative enactment, including attempts to enforce the novel attribution nexus provision, and whether larger e-commerce companies fire their Michigan affiliates similar to their Vermont counterparts earlier this month.

Florida’s Rose By Any Other Name: A “Music Service […] is a Music Service;” Unless It’s An Information Service

Recently, the Florida Department of Revenue (“Department”) issued companion advisory opinions

14A19-005 and -006.  The Department found that purchases and rentals of online movies and music are not subject to sales tax.  Furthermore, purchases are also not subject to communications services tax.   However, rentals are taxable as communications services.

The taxpayer’s video service allows customers to access video in streaming or downloadable format, or both.  Customers either purchase or rent videos.  Purchasers may keep the video permanently and watch it as many times as desired.  Renters, on the other hand, may only watch once, within a certain timeframe from the time of rental.

In addition to purchasing and renting videos, the taxpayer grants access to its digital content to customers who purchase a membership.  That membership program principally features free two-day shipping, but also includes free access to video and music streaming and downloading services..  However, customers who cancel their membership, or allow it lapse, lose access to their digital content.

Generally, Florida only imposes sales tax on the sale of tangible personal property.   Fla. Stat. Ch. 212.05.  Furnishing information by way of electronic images is not the sale of tangible personal property.  Fla. Admin. Rule 12A-1.062.

Florida also imposes a communications service tax on the transmission of voice, data, audio, or video, including “video service.”  “Video service” includes pay-per-view, digital video services, and music service.  However, the sale of information services is specifically excluded from that tax.   Information services include the “capability for […] making available information via communication services.”  Fla. Stat. Ch. 202.11.

Here, the Department found that purchases made from the video service in any format are purchases of an exempt information service for the “capability for” “making available” content, whether for download or by streaming via the customer’s online library.  However, rentals and membership-based access are taxable communications services because “this rental of digital video content [is] a ‘video service’” and, more simply, the “music service benefit is a music service.”  Finally, the taxpayer must determine the portion of the membership charge attributable to digital content rentals prior to collecting the communications services tax.

The Department did not clearly explain why the rentals or, more curiously, the membership services were not exempt information services since they provided the exact same “capability for” “making available” content.  Rather, it confined its analysis to matching product names with terms in the statute, suggesting opportunities for tax planning through creative naming.

Tax Tech Bytes

Minnesota exempts webinars from sales and use tax

Recently, Minnesota revised Tax Fact Sheet 177, announcing that webinars are tax exempt from sales tax starting July 1, 2014. In order to qualify for exemption, webinars must meet the following requirements: (i) in person presentation’s admission is not taxable; (ii) online participants can interact with presenters during presentation; and (iii) interactive limits if any must be the same for online an in person participants.

Washington provides exemption for purchases of financial information

Washington Department of Revenue announced that updated regulations will include a sales tax exemption for purchases of standard financial information by qualifying international investment management companies.

Wisconsin exempts educational webinars from sales tax

Wisconsin released a tax bulletin announcing that sales of live digital online educational services are not taxable. Similarly, live educational seminars are not taxable.

New Jersey amends sales and use tax to include internet nexus

New Jersey is bringing its tax regulations into the 21st century business practices. Recently, New Jersey amended its sales and use tax act to include out of state sellers’ internet activity as nexus. The amendment creates a rebuttable presumption that an out of state seller has sufficient nexus if the seller (i) enters into an agreement with a New Jersey independent contractor for compensation in exchange for customer referrals via the internet to the seller and (ii) incurs sales from these referrals that are New Jersey customers.

Clear Skies for Cloud Tax in South Carolina

Recently, The South Carolina Department of Revenue (“Department”) issued Private Letter Ruling 14-2 which found that cloud computing and storage services are not subject to South Carolina’s tax on communication services.

A non-resident taxpayer requested the Department to determine whether their services are subject to South Carolina’s sales and use tax.  The taxpayer’s services include cloud computing and storage services which provide customers with the ability to process their data with the necessary computing resources. Customers can use their own software, taxpayer’s open source software or a third party’s software licensed by the taxpayer. In addition, no software is transferred to customer. The storage service provides customers the ability to store and retrieve vast amounts of data via the internet.

South Carolina imposes a sale and use tax on tangible personal property and certain enumerated services. These services include communications subject to Chapter 36 Title 12 (Section 12-36-910).  The communications subject to the sales and use tax are for the transmission of voice or messages. These include telephone, paging, cable and data base research/reporting. The communications included in the statute are for the “transmission of the voice or messages.”

The Department ruled that the taxpayer’s cloud computing and storage services do not transmit any voice data. In addition, taxpayer’s services do not render any reports to its customers. The cloud service only provides computer resources which include processors, memory and instant storage. Accordingly, the Department concluded that the taxpayer’s services are not within the scope of taxable communication services.

Idaho: Back-and-Forth on Software Tax

Recently, the Idaho legislatures convened for a draft rule meeting to discuss the recently enacted HB598 (“Rule 027”). The goal of the meeting was to provide guidance and interpretation to assist taxpayers in complying with Rule 027. The end result will be a published administrative bulletin.

The legislatures discussed the sales tax policy and applied it to Rule 027. Fundamentally, tangible personal property (TPP) is subject to sales tax and services are not taxable. TPP includes pre-written software that is delivered in a tangible form. Pre-written software that is electronically delivered or accessed remotely is not taxable. However, entertainment software products are taxable regardless of the delivery method. In general, services are not taxable. But, if a service is delivered tangibly, it may be taxable. For example, a diagnostic service delivered on a cd maybe taxable. Not discussed, however, were several areas of taxability. These include tangible software product key, permanently loaded software with minimal function without access to provider’s services, and fee to view an entertainment product.

During the draft rule meeting, the legislatures displayed inconsistent application of the tax policy. Moreover, Idaho legislatures have difficulty reconciling that a service can be delivered via cloud or cd. In general, Idaho’s tax policy is to exclude services from sales tax.  However, the legislatures defined services by the method of delivery, not the content. For example, software that resides on a cloud is not taxable if downloaded via the internet. But, the same software content that resides on a disc/cd is taxable. In contrast, the legislatures are consistent when applying the tax policy to entertainment products. Entertainment products are taxable based on their content; not on the method of delivery (cd or internet).

Wyoming Reveals “PaaS”sive Approach to Taxing the Cloud

On July 1, 2014, the Wyoming Department of Revenue issued a bulletin to address questions concerning the sales tax treatment of current technologies. The technologies include software, cloud computing and peripheral services.

Wyoming levies a sales tax on tangible personal property. Tangible personal property includes computer software. Specifically, Wyoming taxes pre-written software regardless of delivery method. Custom software, created for a specific client, is exempt from sales tax.

In the bulletin, Wyoming reveals for the first time how it will treat cloud computing products, including SaaS, PaaS, and IaaS.  Cloud computing services will be generally treated as nontaxable purchases for purposes of Wyoming’s sales tax.  This assumes that the purchase of the cloud product is not accompanied by a transfer of tangible personal property or an enumerated service.

Access to the host site itself may or may not be taxable. If a customer is required to purchase an application to access the cloud service, the application is taxable.

The bulletin also states that data storage fees are generally not subject to Wyoming’s sales tax.  However, if host provider manipulates the data or has access to customers’ computers then the fees would be taxable.

Georgia Ruling Affirms Its Position on Electronic Delivery

Recently Georgia’s Department of Revenue (“Department”) issued Letter Ruling SUT 2014-02-20-01 regarding software and cloud service transactions. A Georgia taxpayer requested the Department to determine whether these transactions are subject to Georgia’s sales and use tax. The taxpayer sells pre-written software, software modifications delivered electronically via the taxpayer’s site. The taxpayer is also a reseller of cloud subscription services that allows a customer to access and use vendor software via the internet.

Georgia imposes a sales tax on tangible personal property which includes pre-written software delivered via tangible medium. In the Ruling, Georgia confirms its position that when pre-written software is only delivered electronically, the software is not taxable. The same rule applies to the taxpayer’s pre-written software modifications. In addition, Georgia stated that the cloud computing subscriptions did not involve the transfer of tangible personal property or an enumerated service; and were thus, nontaxable.

Massachusetts Confirms On-Line Training is Tax-Exempt

Recently a Massachusetts taxpayer requested Massachusetts’s Commissioner of Revenue (“Commissioner”) to determine the taxability of its on-line training program. Taxpayer provides an interactive training program for various industries. Taxpayer is the primary source of the on-line content. Taxpayer’s cloud services are hosted by a third party. Customers have modest to limited interaction with the on-line training. Their interaction consists of answering questions to confirm participants’ understanding.

Massachusetts imposes a sales tax on pre-written software regardless of the method of delivery. However, Massachusetts does not subject sales tax on database access. See 830 CMR 64H.1.3 (13).

In instant case, customer was purchasing the on-line training for the information provided and not for the underlying software used to deliver the information. The customer did not receive software nor did customer have the ability to control the software. The Commissioner concluded the true object of the transaction was for accessing information and not the use of software.  Accordingly, the on-line training was not taxable.

The decision may have been different if customers contributed more to the on-line interaction. The Commissioner commented that if a customer was able to produce its own training programs from the interaction, the transaction may be taxable.

Cloud Computing By Any Other Name…

Recently Missouri Department of Revenue amended their sales tax regulations on taxation of software.  Specifically, 12 CSR 10-109.050 was amended to clarify the taxation of canned (pre-written) software, customized software, software as a service, and software licenses.

In general, the new regulations do not break new ground when defining what is canned software or customized software. The new regulations provide that canned software that is delivered in a tangible medium is subject to sales tax. However, if the canned software is downloaded via online, the canned software is not taxable. The new regulations do not tax customized software.

The regulations do break new ground for Missouri by addressing software as a service is not taxable. The new regulations describe cloud computing without mentioning it by name. Missouri refers to cloud computing as software as a service, 12 CSR 10-109.050 (2)(C). The definition includes the typical attributes of what cloud computing, however the Missouri legislature carved out a piece of cloud computing that is taxable. Cloud computing services are taxable if the user/purchaser has the right to use specifically identified TPP. For example, in many cloud-computing environments, a business wants to use dedicated servers to provide efficient use of resources. However, in Missouri a business will not enjoy the tax-exempt status that other states provide.

The final part of the amendment addresses the taxation of software licenses. In general, software licenses are taxed if they are a part of the original sale agreement. However, if licenses are purchased at a subsequent time or via a third party, they are not taxable.

This new legislation may shift how enterprises conduct business by providing tax-planning opportunities. For example, a company needing a significant number of licenses can either purchase from a third party or purchase them outside of the original software agreement.  Another example, a company may choose to obtain all their software by internet delivery. In addition, this legislation will leave Missouri businesses at a competitive disadvantage when competing for businesses that require specifically dedicated resources for their needs.