Virginia Confirms Position on Cloud Computing Services

Recently Virginia issued Public Document Ruling No. 14-42 concerning, in part, the taxability of cloud computing services. A Virginia taxpayer requested that Virginia’s Tax Commissioner clarify the state’s position regarding sales and use taxation of cloud computing services.  Taxpayer sells software to various types of businesses.

Virginia provides an exemption from sales and use tax for services not involving an exchange of tangible personal property that include software delivered electronically. Virginia generally treats cloud computing services in the same manner as the electronic transfer of software products. This treatment is supported by the fact that usually is no transfer to customers of cloud computing services. Accordingly, the Tax Commissioner concluded that cloud computing services are an exempt service to Virginia’s sales and use tax. This conclusion is consistent with two other Public Document Rulings (12-191 and 13-182) that expressed Virginia’s position on cloud computing services.

Idaho Has an App for That …Part II

Idaho’s Governor recently signed HB 598. As stated in our previous posting, HB 598 is to provide clarity to HB 243, which exempted cloud computing services from Idaho’s sales tax.  Effective July 1, 2014, HB 598 exempts from Idaho’s sales and use tax computer software that is electronically delivered, remotely accessed, or delivered by a vendor to user’s location. In addition, HB 598 carves out from this tax exemption entertainment related software including digital music, digital books, digital videos and digital games.

Colorado Feels the “Effect” of the Drawn Out Debates over the Marketplace Fairness Act?

Colorado’s legislature is debating whether to delay the effective date of its so-called remote-seller law.  The law was enacted to allow Colorado to require on-line retailers to collect sales tax on retail sales for items delivered within the state of Colorado as permitted by the Marketplace Fairness Act of 2013 (“MFA”).  This remote-seller law was passed in May, 2013 and was to become effective July 1, 2014.

There is just one problem; Congress has not passed the MFA or any equivalent law. Without Congress passing the MFA, Colorado’s remote seller law cannot take effect in July because the law relies on the MFA to authorize Colorado to require the collection of sales tax by on-line retailers.

Colorado’s legislature is now working on additional legislation—HB 1348—that would amend the effective date of the remote-seller law.  Under the new legislation, the remote-seller law would go into effect only when Congress enacts an act that authorizes states to require certain retailers to pay collect or remit sales tax.  If HB 1348 passes, Colorado would join many other states who have amended their statutes to impose tax collection obligations on remote-sellers only after Congress acts on this issue.  Currently, HB 1348 is in Colorado’s House Finance Committee.

Texas Issues Notable Ruling on Tax of Digital Services

The Texas Comptroller of Public Accounts recently issued a decision regarding the taxability of digitized services provided by a Taxpayer to oil and gas industry customers. The Taxpayer’s digitized service involves analysis of gas well log data received and the tailoring of that data in reports to the client to its specific needs.  For example, the Taxpayer might take gas well data and analyze it against certain production goals as set by the client.  The digital component of the service would therefore be taking the raw well data and measuring it against certain output or production goals as set by the client to determine an overall productivity result.  That analysis and the results would be provided to the client as its final product.

Notably, the Comptroller upheld the auditor’s sales tax assessment on digitized services as data processing services.

Texas imposes sales tax on data processing services. Data processing services are defined as the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. The auditor issued the tax assessment based on taxpayer’s description of digitized services on its website. Taxpayer’s website described well log digitizing as the conversion of client-provided data. Taxpayer’s other digitized services included converting the data into a word document. Texas auditors focused on the word “conversion” to conclude taxpayer’s digitized services are taxable data processing services. The auditor argued that “conversion” of data does not equate to analyzing data, which is not specifically taxable under the data processing statute.

This ruling suggests that the auditor was willing to reach conclusions on the taxpayer’s services by simply referring to information available about the Taxpayer on a public domain. This ruling may also be a harbinger of when auditors are forced to determine the taxability of cutting-edge technology and services–they may opt to characterize a product or services in a manner most familiar to the auditor.

Miller Quoted in State Tax Notes Article on Tax on Streaming Video

Kelley Miller was recently quoted in a State Tax Notes article on Streaming Video.  In commenting on Kentucky’s decision to tax certain streaming video as a utility, Miller said:


While Kentucky’s approach to streaming is an outlier, Kelley Miller of Reed Smith LLP said she doesn’t think it’s far-fetched or far-reaching. She said it may be more appropriate to think of digital streaming video as a telecommunications product.

“[Streaming] is bits and bites going across an Ethernet,” Miller said. “If you think of it that way, isn’t it like [voice over Internet protocol]?” By default, treating streaming as telecommunications would mean taxing it as a utility, she said. While that approach might seem odd, it may be the direction society is going as people choose on-demand entertainment instead of traditional cable, she said.

Idaho Has An App For That

Last year Idaho’s House of Representatives enacted HB 243, exempting cloud computing services from Idaho’s sales tax. However, the legislation led to more questions and uncertainty. Thus, Idaho’s House of Representatives introduced HB 598 to provide clarity to HB 243. However, based on the governmental entities’ comments and legislation many issues remain unsettled.

Under Idaho’s current regulations, all tangible personal property is subject to sales tax. Tangible personal property includes software that is not customized and is not application software accessed over the internet or via wireless media. However, this exclusion does not include application software whose primary purpose is for entertainment use. The exclusion also does not include software that can be accessed over the Internet where the same software is sold in stores or by electronic download. This exclusion results in confusion and inconsistency. For example, if a user accesses tax software that also can be purchased at a store, the user would be taxed on accessing the tax software. However, if this same tax software was only accessible online, it would not be taxable.

Under Idaho’s proposed HB 598 some confusion was eliminated. For example, the inconsistent results for the tax on software would be eliminated. However, other tax issues would remain unsettled for software products. For example, digital subscriptions to access digital movies which the user streams remain uncertain. Here, the software to view a movie is provided free of charge and the movie does not reside on users computer.

Will Idaho take the position of a “true object” analysis of this transaction or introduce another amendment to clarify? As this blog is being posted, the legislation is on the Governor’s desk for his signature.

Nebraska Clears the Haze on Cloud Computing Services….

The Nebraska Department of Revenue recently updated Nebraska Information Guide No. 6-511-2011, to address the taxability of cloud computing services. Per this update, cloud computing services are explicitly exempt from Nebraska sales and use tax. Prior to the update, sales of services were exempt unless specifically designated as taxable.

Cloud computing allows customers to remotely access software applications, operating systems and other network components via an internet link, internet website or other means. The cloud computing exemption for Nebraska sales and use tax is true regardless of the location of the software, hardware or other network components.

C“hoosier” Affiliates Carefully: Indiana Bill Targets Fulfillment Centers

On January 17, Indiana introduced Senate Bill 269 that, if enacted, would add click-through and affiliation provisions to the sales and use tax laws. In addition, the proposed legislation specifically includes nexus for a fulfillment center (IC 6-2.5-3-1(c)(3)). Indiana’s proposed legislation is very similar to Tennessee’s in that both appear to be responses to the lost sales tax revenue from Amazon. Amazon’s footprint in Indiana is quite large, with four fulfillment centers located in the state.

Under the click-through provisions, a retail merchant is presumed to have click-through nexus if it enters into an agreement with a resident of Indiana, or directly or indirectly refers potential purchasers to the retail merchant. The referral can be via an internet link, website or other means.

Under the affiliate provision, a retail merchant is presumed to have affiliate nexus if it has an affiliate (as defined in 26 U.S.C. 1563(a)) in Indiana and has substantial nexus. Similar to other states, Indiana’s substantial nexus is determined by similar product lines or similar/substantially similar trade and service marks. In addition, Indiana has an additional proposed nexus factor– substantial nexus may also be established if the affiliate uses its Indiana employees or its Indiana facilities to advertise, promote or facilitate sales.

The presumption of nexus, however, may be rebutted in either case by submitting evidence that the Indiana resident with the agreement did not engage in any activities that was significantly associated with the retail merchant’s ability to establish or maintain a market.

If enacted, the legislation provides for a transition period. If an agreement is entered into, payment for property or delivery of property occurs after June 30, 2014, this legislation would be effective July 1, 2014. However, if any of the transactions just delineated occur before June 30, 2014, legislation would be effective January 1, 2016.

Stay tuned for updates as the bill progresses through Indiana’s legislature.

Tennessee: A Sweeping Affiliate Nexus Proposal

In other news from Tennessee, on January 15, Tennessee introduced H.B. 1537 that, if enacted, would add click-through and affiliation provisions to the sales and use tax laws. Tennessee’s proposed legislation in all likelihood is in response to the lost sales tax revenue from   Amazon’s footprint in Tennessee is quite large with three large fulfillment centers in Tennessee.

Under the click-through provisions, a person is presumed to have click-through nexus if a person enters into an agreement with a resident of Tennessee, for consideration, directly or indirectly refers potential purchasers to the person. The referral can be via an internet link, internet website or other means.

The presumed nexus may be rebutted only by clear and convincing evidence that the Tennessee resident with the agreement did not conduct any activities that would substantially contribute to the person’s ability to establish and maintain a market.

Under the affiliate provision, substantial nexus to a person who does not have a place of business in Tennessee is established through the person’s affiliate’s maintenance, use, ownership or operation of any place of business having a presence in Tennessee. This presence must substantially contribute to the person’s ability to establish and maintain a market.

Unlike other proposed or affiliate statutes, this bill does not explicitly state what “factors” are considered in determining nexus. For example, in Hawaii’s proposed legislation, substantial nexus is determined by similar product lines or similar/substantially similar trade and service marks. Consequently, this language could result in aggressive enforcement measures by the state.

Stay tuned for updates as the bill progresses through Tennessee’s legislature.

Tennessee Skies Still Look Clear for Cloud Computing

Yesterday, the Tennessee Department of Revenue issued Letter Ruling #13-21.  In the Letter Ruling, the Department considered the taxability of three distinct transactions.

 The first two scenarios involve demonstrations of software.  The Ruling concludes that when a taxpayer creates a “virtual lab” for testing and demonstration purposes, whereby it loads full-version software or a trial version of that software (for which it has a license) either on it OR its customer’s hardware, any charge relating to the same is not subject to Tennessee sales and use tax.  The key factor in both of these instances was that there was no actual transfer of any license to use the software, and that a transfer of the same would be necessary to create a taxable sale.  Moreover, the Ruling provides that creating a “virtual lab” under either of these scenarios would not fall within any definition of a taxable service.

This Ruling is most notable, perhaps, for its conclusion involving a third scenario—the sale of digital back up services.  Here, the taxpayer backs up the customer’s data to the taxpayer’s servers—and, as the Ruling notes—it does so by creating a copy (digital) that it will provide to the customer upon request.

Tennessee has not been a state to shy away from the consideration of the taxability of electronic and cloud-based services (e.g., electronic data backup, which might be characterized as “cloud computing”).  In a series of prior guidance, the Department has maintained a consistent position that access to data or software or charge for storage or retrieval of the same is not taxable:

            -Fee for access to software = not taxable.

            -Charge for data storage and retrieval = not taxable.

            -Fee for access to software housed outside of Tennessee = not taxable.

The reasons?  No transfer of title, control or possession of the software, which is required under Tennessee’s sales tax laws.  Letter Ruling #13-21 re-affirms this conclusion, providing that data backup does not involve the transfer or possession of title and that data backup is not a taxable service.  Thus, taxpayers questioning the taxability of their cloud-based products or software services to Tennessee customers have yet another source for guidance: the key, it seems, is a transfer title or possession of TPP.  Without this, and barring the provision of an enumerated, taxable service, the outlook for cloud taxability questions remains clear.