STATE TAXATION OF CLOUD COMPUTING Maria Biava, Verizon Eric Tresh, Sutherland Asbill & Brennan LLP Michele Borens, Sutherland Asbill & Brennan LLP November 13, 2012
AGENDA What is Cloud Computing? > Different service models (SaaS v. IaaS) How are taxpayers addressing the taxation of Cloud Computing? How are states taxing Cloud Computing? How to develop tax policy to address the taxation of Cloud Computing? > Options for providing consistent, reliable guidance / / 2
WHAT IS CLOUD COMPUTING?
WHAT IS CLOUD COMPUTING? Depending on the service provider, Cloud Computing can be used to describe different types of service models: Access to software (SaaS) Access to platform (PaaS) Access to infrastructure/hardware (IaaS) These service models have distinct characteristics, but many states attempt to combine them all into a generic Cloud Computing bucket. / / 4
CLOUD SERVICE WHAT ARE THE COMPONENTS? Customer Service Provider IaaS / PaaS Users Applications Tools OS Hardware Network Physical SaaS Users Applications Tools OS Hardware Network Physical Indicates separation between Provider and Customer / / 5
HOW ARE TAXPAYERS ADDRESSING THE TAXATION OF CLOUD COMPUTING?
HOW ARE TAXPAYERS ADDRESSING THE TAXATION OF CLOUD COMPUTING? Exclusive survey conducted of leading Cloud Computing Providers 7 key questions asked about the companies decisions and experiences regarding the taxation of Cloud Computing Survey results illustrate that taxpayers lack clarity from states regarding the proper sourcing of cloud computing transactions/receipts / / 7
SURVEY RESULTS How does your company source sales of cloud computing services for sales tax purposes? Customer billing address Customer physical location Where service is performed/server location Other/varies by state and/or type of service (please specify) / / 8
SURVEY RESULTS Does your company apportion sales of cloud computing services for sales tax purposes if the benefit of the service is received at more than one customer location? Yes No / / 9
SURVEY RESULTS Does your company apply costs-of-performance (COP) sourcing to receipts from sales of cloud computing services in states that allow for COP sourcing? Yes No Sometimes / / 10
SURVEY RESULTS If your company applies COP sourcing to receipts from sales of cloud computing services, are sales generally sourced to the server location? Yes No / / 11
SURVEY RESULTS In states that require market sourcing for receipts from sales of cloud computing services, how does your company source sales? Customer billing address Customer physical location Where service is performed/server location Other/varies by state (please specify) / / 12
SURVEY RESULTS Has a state examined or audited your cloud computing sourcing determinations for: Sales tax Income tax Sales tax and income tax Neither sales tax nor income tax / / 13
SURVEY RESULTS If your cloud computing sourcing determinations have been examined or audited, has the sate challenged or questioned (check all that apply): 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Sourcing determination Taxability determination: asserted it is a taxable telecommunications service Taxability determination: asserted it as a taxable data processing or information service Other (please specify) / / 14
HOW ARE STATES TAXING CLOUD COMPUTING?
STATES APPLY VARIOUS EXISTING METHODOLOGIES IS IT A SERVICE? Not an enumerated taxable service not taxable Expressly exempted VT (temporarily), RI (remote access) Taxable service > Information service > Data processing service TX, OH > Digital automated service WA > Computer-related services CT > Communication service SC But electronically downloaded software is not taxable / / 16
STATES APPLY VARIOUS EXISTING METHODOLOGIES IS IT SOFTWARE? Generally, there must be a transfer of software. States have attempted to tax the electronic transfer using different theories, including: > A taxable transfer is effected by any means, including electronic access (Illinois, and several others) > A taxable transfer occurs when there is a remote access (Massachusetts, Washington) > A taxable transfer occurs when there is a license to use the software > Constructive Possession: A taxable transfer occurs when a customer has the right to control, use, or direct the use of software (New York) But what constitutes use? > Utah has a new broad interpretation / / 17
HOW CAN STATES FIX THIS MESS?
CREATING SOUND TAX POLICY Two Fundamental Tenants of Sound Tax Policy > Provide Consumers a Tax Neutral Choice > Functionally Equivalent Services Should Be Taxed the Same Goals of Reform > Foster growth and innovation > Acknowledge transition from manufacturing economy to knowledge economy taxes impact investment decisions > Simplify compliance for taxpayers and administration for tax agencies (not mutually exclusive) > Protect state tax revenues (prevent sales tax base erosion) > Transparency Taxpayers and policymakers should know the rules / / 19
CREATING SOUND TAX POLICY Taxes should be easy for the state tax agencies to administer and for taxpayer s to comply with >Uniform definitions throughout the country >Uniform rules for sourcing sales and income taxes >Clear rules for bundles / / 20
CREATING SOUND TAX POLICY Several Avenues to Achieve Precedential, Consistent Guidance State Legislation > Proposing state legislation to clarify the taxability of Cloud Computing services. > e.g., Washington s digital services sales tax statute > Creates more permanent solution > Consider use of industry groups, coalitions or other forums to gain consensus and group support / / 21
CREATING SOUND TAX POLICY Several Avenues to Achieve Precedential, Consistent Guidance State Regulations, Administrative or Other Guidance > Request that states amend regulations or update administrative guidance to address state s position on taxability of Cloud Computing services. > Establishes public guidance and state policy > However, regulations and other guidance may be easier for state to amend or change position. / / 22
CREATING SOUND TAX POLICY Several Avenues to Achieve Precedential, Consistent Guidance Federal Legislation > e.g., moratorium on taxation (similar to ITFA), inclusion in digital goods bill, other federal legislation > Establishes uniform treatment > However, may be more difficult to gain support and passage / / 23
CREATING SOUND TAX POLICY Several Avenues to Achieve Precedential, Consistent Guidance Streamlined Sales State Tax Agreement ( SSTP ) > Address in SSTP definitions > Create some uniformity in definitions in SSTP states > However, states may still choose differing taxability decisions > Only helps to address a portion of the states / / 24
CREATING SOUND TAX POLICY Several Avenues to Achieve Precedential, Consistent Guidance Multistate Tax Commission ( MTC ) > Propose and work with MTC to develop model legislation addressing Cloud Computing > States may then adopt Model laws > May create some uniformity in taxation > Model law must still be enacted by state legislature / / 25
Questions? / / 26