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Head in the Clouds? You Might be Subject to Sales Tax

08.07.17 | SALT Chat

I may want you to get off my cloud, but that just might not be possible like it was back in 1965 when Mick Jagger and Keith Richards urgently begged their listeners to do so[1]. You see, those of you not old enough to remember the days when you had to buy software on tangible media (floppy disk, compact disc, or flash drive) and install it yourself may actually have your head in the clouds and not be aware that many jurisdictions are seeking to tax the cloud equivalent, often referred to as “software as a service (“SAAS”).

A quick scan of the rules indicates that at least 15 states currently subject cloud computing to sales tax, so it wasn’t a surprise when New York State handed down a recent Advisory Opinion[2] answering in the affirmative, that the “Cloud Collaboration Service” offered by the Opinion’s requestor, is subject to the sales tax.

What are New York and the other 15 or so jurisdictions thinking when subjecting cloud computing to sales tax? We know that the tax generally applies to the sale of tangible personal property and only to services if they are specifically enumerated. For example, we all know that if we buy a new flat screen TV, we are going to pay the tax but whether or not we owe tax on security services depends largely on where we live. State tax professionals struggle to keep up with the latest technological offerings, so you can just imagine where the state legislature, busy with so many other matters, might fall on the awareness spectrum. Can we expect a new law with every new technological breakthrough?

Facing withering sales tax revenues, New York and other revenue departments clearly decided they can’t wait. Since the “Cloud Collaboration Service” being offered appears to be (at least to the various revenue departments) the equivalent of having to buy and install “canned” (non-custom) software as we did in the stone ages, why not subject it to tax?

While I can think of many reasons not to, whether your “product” is a canned software equivalent is not the only query you need to make. As the jurisdictions are all over the map on this one, the next conclusion to reach is where (in the cloud) the “product” is being used. This determination is subject to another set of rules, for another day. In the meantime, make sure you don’t hide your head in the sand or the cloud, in determining whether or not you are on either side of a taxable transaction.

If you have questions about this Cloud Collaboration Service concept or if you are uncertain if you owe taxes, I can be reached at WBerkowitz@BerdonLLP.com or contact your Berdon advisor.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.

[1] The song “Get Off of My Cloud” appears on the 1965 Rolling Stones Album “December’s Children (And Everybody’s).  This is the last Rolling Stones album where fifty percent of the songs were written by others.  “Get Off of My Cloud” was in fact written by Jagger and Richards and is said to be in reaction to everyone bugging them to have a follow up hit to “Satisfaction.”

[2] See TSB-A-17(9)S (July 6, 2017).