1 DIGITAL GOODS & IPT ANNUAL CONFERENCE CLOUD COMPUTING Jennifer Jensen S. Matthew McNeilly State & Local Tax Director Sr. Manager State/Local Tax PricewaterhouseCoopers Amazon.com McLean, VA Seattle, WA
2 CLOUD COMPUTING INDUSTRY OVERVIEW Helpful definition developed by National Institute of Standards & Technology: Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.
3 CLOUD COMPUTING INDUSTRY OVERVIEW Essential characteristics: On-demand self-service Broad network access Resource pooling Rapid elasticity Measured service
4 CLOUD COMPUTING INDUSTRY OVERVIEW Three primary classifications: Infrastructure as a Service ( IaaS ) Platform as a Service ( PaaS ) Software as a Service ( SaaS ) More X as a Service models emerging regularly Cloud computing does not include transactions that merely occur in the cloud such as purchase of digital goods, streaming music or video, or in-app purchases
5 PRACTICAL CONSIDERATIONS Understand exactly what the cloud computing service entails Is software involved? If so, is it open source? Is software the true object of the transaction or merely incidental? Are other services provided? Understand legal agreement, intent of the parties, and invoice presentation Two different vendors may classify their nearlyidentical service offerings differently
6 VARYING STATE TAX APPROACHES Tangible personal property Information services Data processing Computer services / Digital automated services Telecommunications services Web hosting Remote storage service
7 OVERVIEW OF STATE TAX TREATMENT SaaS / Remote access software / ASP License may or may not be granted No download of the software to customer s location Some states have concluded that there is no transfer (download) of TPP; therefore, nontaxable For example: NJ, OK, CO Others do not recognize this distinction and tax software the same regardless of how accessed For example: WA Other states tax SaaS / remote access software under a service classification For example: CT, TX, OH, SC
8 OVERVIEW OF STATE TAX TREATMENT IaaS Computing power Remote storage Both are generally viewed as nontaxable services, except in states that broadly tax computer services (e.g., CT) or data processing services (e.g., DC, TX, OH) Note the specified exemption for remote storage services in WA Tennessee DOR recently opined on both types of IaaS (computing power and remote storage) in LR (both found nontaxable)
9 SOURCING CONSIDERATIONS Generally, sourced to the location where the customer uses the services Many states source service-based transactions subject to the same hierarchy as all other retail sales Multiple Points of Use ( MPU ) available in some states Local tax sourcing in origin-based states
10 RECENT DEVELOPMENTS Michigan - Auto-Owners Insurance v. Dept. of Treasury Access to third party software hosted remotely was properly characterized as a nontaxable service as opposed to the sale of prewritten computer software Taxpayer did not take delivery of the software Although computer software was involved in the transactions, the taxpayer did not obtain the requisite level of control required to satisfy the definition of use of the software Even if software was delivered to the taxpayer, the software was in fact simply an incidental component of the principal transactions for the various services
11 RECENT DEVELOPMENTS Idaho H.B. 598 takes effect July 1, 2014, and excludes from the definition of tangible personal property computer software that is delivered electronically; remotely accessed computer software; and computer software that is delivered by the load and leave method where the vendor or its agent loads the software at the user s location but does not transfer any tangible personal property containing the software to the user The legislation replaces and expands a partial exemption for remote software that was enacted in 2013 via H.B. 243
12 RECENT DEVELOPMENTS Illinois Department of Revenue recently issued a general information letter (ST GIL) regarding the applicability of the state s telecommunications excise tax to a taxpayer s cloud-based services Taxpayer provided a cloud collaboration service offering that provided remote hosting of software that provided enhanced functionality for a customer s phone system The Department found that the service did not constitute the provision of telecommunications service
13 RECENT DEVELOPMENTS Arizona Department of Revenue recently issued a private taxpayer ruling (LR13-006, June 25, 2013) regarding the applicability of Arizona s transaction privilege tax to two types of offerings The first offering allows customers to obtain and control computing capacity that is provisioned remotely Was found to be the taxable under the rental classification The second offering allows customers to store, retrieve, and maintain content, data, applications, and software on the taxpayer s servers Was found to be nontaxable
14 RECENT DEVELOPMENTS Indiana Letter of Finding (Feb. 12, 2014) Internet-based information platforms and computer software maintained on servers outside the state, but accessed via the Internet may be taxable transfers of prewritten software. Access of prewritten software, even if via the cloud, constitutes a taxable transfer of software because customers gain constructive possession and the right to use, control, or direct the use of the software. New York Sales of a product that provides users single sign-on access to electronic research and data from multiple sources are subject to sales and use tax because the product, in aggregating the information, is a taxable information service. N.Y. Advisory Opinion, TSB-A-14(3)S (Jan. 27, 2014)
15 DIGITAL GOODS INDUSTRY OVERVIEW In 2008, 10 million ebooks were sold in the United States; in million ebooks were sold. A 2013 music industry report showed that digital album sales comprised 43% of all U.S. album sales made in the first 6 months of The same report says there were more than 50 billion audio and video streams in the US in the first six months of Apple, Inc. recently announced that customers spent more than $10 billion in the App Store in Customers downloaded almost 3 billion apps in December 2013 alone. Netflix generated more than $2.7 billion in revenue from its domestic streaming segment in 2013.This represented a 26% increase in revenue generated from that segment during 2012.
16 STATE APPROACHES Tangible personal property Electronic delivery/digital equivalents Streamlined Sales and Use Tax Agreement Permanent use/streaming Services Digital codes/in-app purchases
17 PRACTICAL CONSIDERATIONS What is being sold? How is it delivered or accessed? Does this affect the taxation? Who is the buyer? Who is the user? Do exemptions for tangible property apply to digital property?
18 SOURCING CONSIDERATIONS Similar to cloud issues Often sourced to the location where the customer uses or receives the product With mobile devices, locations can constantly be changing. What is the practical solution that states will accept? Digital goods could be accessed in multiple jurisdictions simultaneously Following the Mobile Telecommunications Sourcing Act?
19 RECENT DEVELOPMENTS Maine S 673, passed without Governor s signature on 4/2/2014 New Maine legislation clarifies that the term tangible personal property includes any product transferred electronically for Maine sales and use tax purposes. The legislation is effective 90 days after adjournment of the Second Regular Session of the 126th Maine Legislature. PwC Slide 19 IPT 2014 ANNUAL CONFERENCE
20 RECENT DEVELOPMENTS Excise Tax Advisory No , Washington Department of Revenue (3/7/2014) The Washington Department of Revenue issued an excise tax advisory on the taxability of alarm monitoring services as a digital automated service (DAS). If an alarm monitoring service is transferred electronically and uses one or more software applications it is subject to sales tax and retailing B&O tax as a DAS, unless the exclusion for primarily human effort applies. If an alarm monitoring service does not have an automated component and is not transferred electronically, it is subject to the service and other activities B&O tax. PwC Slide 20 IPT 2014 ANNUAL CONFERENCE
21 RECENT DEVELOPMENTS New York Advisory Opinion TSB-A-14(1)S (1/23/2014) The New York State Department of Taxation and Finance ruled that an e-book is not taxable as an information service, even when shared across multiple devices or e-readers and sold with a timelimited license. The product, a study guide for a financial accreditation exam, met the definition of an e-book by meeting certain criteria. PwC Slide 21 IPT 2014 ANNUAL CONFERENCE
22 RECENT DEVELOPMENTS Letter Ruling No. LR 7338, Missouri Department of Revenue (12/20/2013) The Missouri Department of Revenue held that a sale or rental of streaming video content is not subject to sales or use tax. The taxpayer provides a digital video streaming service where the customers purchase or rent video content which is then streamed through a variety of devices including televisions and computers. The customer is required to have internet access, but it is not provided as part of the service. According to Missouri regulation, sales tax only applies to the sale of canned programs delivered in a tangible form. Therefore, the sale of digital content that is delivered over the internet is not subject to sales tax. PwC Slide 22 IPT 2014 ANNUAL CONFERENCE
23 RECENT DEVELOPMENTS Ruling of Commissioner, P.D , Virginia Department of Taxation (12/19/2013) Online gaming related items, including video game console points cards and video game online memberships are not subject to sales and use tax in Virginia. The memberships and point cards are used to watch movies and television shows, listen to music, access social media, download arcade and full video games, and update games with new map packs, songs and workouts. The Virginia Department of Taxation ruled that the points cards and memberships serve as mediums for securing access to online amenities. Since such items do not meet the definition of tangible personal property, the online memberships and point cards are not subject to tax. PwC Slide 23 IPT 2014 ANNUAL CONFERENCE
24 RECENT DEVELOPMENTS Letter Ruling , Oklahoma Tax Commission (9/16/2013 released 12/2013) Online gaming related items, including video game console points cards, video game online memberships, and online point cards are not subject to sales and use tax in Oklahoma. The memberships and point cards, which are available for purchase both online and at a brick and mortar store, are used to watch movies and television shows, listen to music, access social media, download arcade and full video games, and update games with new map packs, songs and workouts. The Oklahoma Tax Commission held that the memberships and point cards are not subject to tax in Oklahoma, citing a rule on gift certificates. PwC Slide 24 IPT 2014 ANNUAL CONFERENCE
25 RECENT DEVELOPMENTS General Information Letter GIL , Colorado Department of Revenue (8/20/2013 released on 10/24/2013) The Colorado Department of Revenue clarified that sales of books, music and movies either in the form of paper, CD, DVD, celluloid or electronically delivered digital goods remain subject to tax despite the reinstated exemption for electronically delivered software. Effective July 1, 2012, the Colorado legislature modified the definition of tangible personal property to exclude electronically delivered computer software. In the legislative declaration for this legislation, it stated that the amended definition does not alter the tax treatment of "digital goods," "application service providers," "software as a service," or "cloud computing." Therefore, the Department will continue treating the sale of electronically delivered goods, such as music, movies, and books, as taxable sales of tangible personal property. PwC Slide 25 IPT 2014 ANNUAL CONFERENCE
26 RECENT DEVELOPMENTS Ohio HB 59, Laws 2013, signed by Governor 6/30/2013 As part of a large budget bill, the sales and use tax will apply to digital products, such as electronically transferred digital audiovisual works, digital audio works, or digital books effective January 1, PwC Slide 26 IPT 2014 ANNUAL CONFERENCE
27 RECENT DEVELOPMENTS Information Guide , Nebraska Sales and Use Tax for Photographers and Photofinishers, Nebraska Department of Revenue (6/19/2013) Photographs delivered electronically, with no physical transfer of prints, negatives, CDs, or other tangible items, are exempt from sales tax. The photographer's records must clearly indicate which photography was transferred electronically. No exemption certificate is necessary. However, a video is taxable whether it is electronically delivered or delivered by traditional means (for example, on a video tape cassette) because when sent electronically, it is a digital audio-visual work. Digital audio-visual works are taxable and must be taxed separately from tangible personal property. PwC Slide 27 IPT 2014 ANNUAL CONFERENCE
28 RECENT DEVELOPMENTS Taxing Issues, Vol. 16, Quarter 2, Wyoming Department of Revenue (6/1/2013) A digital code is a specified digital product, and is taxed the same as the specified digital product it is related to. Game code cards which provide the purchaser with a code to purchase TV shows and movies, download and update games with new information as well as download new songs and workouts are taxable as a digital audio visual work. These types of cards are taxable at the time the card is purchased, and not when the purchaser utilizes the card. PwC Slide 28 IPT 2014 ANNUAL CONFERENCE