Editors’ Note: The following post is by our guest editor, Michael Lurie. Michael is a member of Reed Smith’s 2012 Summer Associate class, resident in our Philadelphia office. Michael recently completed his second year at Temple Law School, and is a Research Editor of Temple Law Review. He is an avid reader of tax and legal blogs.
In a recently issued Letter Ruling, the Massachusetts Department of Revenue took a novel stance to the taxability of cloud computing: cloud computing is non-taxable if the software involved is open-source or provided by the customer and is taxable otherwise. The ruling essentially provides that if a cloud computing company gives users a “virtual download” of say, Apache’s OpenOffice, then the sale is not taxable, however, if the provider gives users access to Microsoft Office, then that sale would be taxable unless the user provides the software (and license) to the cloud computing company.
The logic behind the ruling is that canned software is considered taxable tangible personal property in Massachusetts regardless of the means of delivery, and that the object of a purchase of cloud computing that allows the use of canned software is the use of the canned software. The ruling explicitly provides that whether or not the customer downloads the software is irrelevant. Free software or customer provided software is not taxed because the object of those transactions could not be to use the software since the customer could either get it for free or already has the right to use it.
This ruling, however, assumes that the object of purchases by cloud computing users who receive canned software is to use the canned software. As the Department itself acknowledges in another ruling, software can be incidental to a sale and not the object of it. Some consumers might not care about what software is provided as long as they can access their data remotely. In such cases, the tax might create an economic inefficiency by promoting the use of open source software even if licensed software would be preferable before tax.