Sales Tax, SaaS, and Cloud Computing. Colorado Bar Association Tax Luncheon September 26, 2012

Sales Tax, SaaS, and Cloud Computing Colorado Bar Association Tax Luncheon September 26, 2012 Presented by Bruce Nelson, M.A., CPA bnelson@eksh (970) 282-5446 Ehrhardt Keefe Steiner Hottman PC 7979 E Tufts Avenue, Suite 400 Denver, CO 80237

State Sales Tax and Software as a Service (SaaS), Application Service Providers (ASP), and Cloud Computing? According to many state tax administrators, SaaS, ASP, and Cloud Computing are undermining the tax base in sales tax and costing the states millions of dollars in lost tax revenue. They are probably right and states are struggling to determine just how to address the activities that fall under these acronyms. For example, Gartner, a technology research and advisory company, estimates that worldwide cloud services revenue in 2014 will reach $148.8 billion. SaaS and ASP are new business models for software delivery that have become synonymous with cloud computing, an environment in which software applications are provided over the Internet as a service rather than selling a product over the counter or for digital delivery. In short, SaaS and ASP allow customers to access specific software applications over the Internet through third-party providers rather than through a single purchase loaded on a single computer. An ASP often owns a software application and related hardware that it leases to customers for a periodic fee. Such activity is not actually new and its roots can be traced back to the time-sharing provided by IBM and other larger mainframe providers in what can now only be described as the Stone Age of computing. The Kansas Department of Revenue notes that the common features of ASPs include ownership and operation of software applications and servers made available over the Internet on a per-use basis or fee. SaaS is an extension of ASP that generally dispenses with the client-server applications common to ASP and usually involves managing and hosting its own software rather than that of independent third-parties. Cloud Computing is a generic term that also covers other activities such as Infrastructure as a Service (IaaS) and Platform as a Service (PaaS). IaaS refers to the provision of a variety of IT resources that allows consumers access to storage, processing, and networking capabilities allowing them more efficiently run their own operating systems and applications. Unlike SaaS that provides software, IaaS provides access to hardware such as servers, memory, network equipment, CPUs and disk space. Amazon s Web Services is an example of IaaS. PaaS provides consumers a platform and tools for designing, developing, building, and running their own applications. PaaS is similar to SaaS, but instead of providing software access, PaaS provides the platform for the creation of software delivered over the Web. States have provided limited or no guidance in how to tax IaaS or PaaS. However, some states have been providing some direction with respect to SaaS and ASP. There are several key questions that a taxpayer should keep foremost in mind when approaching the taxability of these products. They include the following: First, does the ASP or SaaS provider have nexus in the jurisdiction in which it is providing its product or services? Is ASP or SaaS the sale or license of software or the performance of a service? Is the true object test applicable to ASP or SaaS? If ASP and SaaS are the sale of services, are those services taxable?

If ASP and SaaS are the sale of software, is it canned or custom software? If ASP and SaaS are software, is a sale exemption available? Or, does machinery and equipment used to program the software and manufacture it qualify for any manufacturing or processing exemptions? If the services are taxable, where is the service provided -- the vendor's location, the customer's location, the server's location, or the location at which the application is accessed or used? And what if there are multiple users in multiple locations? Not surprisingly the states have taken varying and inconsistent positions on these questions. In some states, ASP and SaaS may not be taxable because the state does not impose tax on electronically delivered software or because there is no sale of tangible personal property (no change of ownership or title and no license to use the software on the vendor s Web site.). Other states may not tax these activities because the server is not located in the state or it is a nontaxable service not specifically enumerated in the statute as taxable. However, other jurisdictions may tax ASP and SaaS as an information or data processing service or as a lease, license, or sale of canned software. States that tax information services and/or data processing seem to be the most troublesome. States that tax information services include Florida, Massachusetts, New Jersey, New York, Oklahoma, and West Virginia. States that tax data processing include Minnesota, Mississippi, North Dakota, and Rhode Island. States that tax both information services and data processing include Connecticut, Hawaii, New Mexico, Ohio, South Dakota, and Texas. Like many 21 st Century computer applications, the fundamental problem is that the traditional sales tax model has several key elements: acquisition, delivery, and transfer of ownership of tangible personal property. In cloud computing all of those elements are called into question. It is not clear what has been acquired tangible personal property or a service. It is not clear whether anything has been delivered, or where it has been delivered, or whether the concept of delivery is even applicable. Finally, Software as a Service by definition conflates tangible personal property and services thereby calling into question any transfer of ownership. In short, a state s position on those specific elements is the key to successfully understanding how a state is taxing or not taxing activities in the Cloud. Finally, the distinctions between software, digital goods, and SaaS have become blurred. As a consequence, some states, like Colorado, that do not tax software delivered electronically will tax digital goods. Other states, such as New Jersey, will tax personal use software delivered electronically and digital goods, but will not tax SaaS. The following is a brief summary of state rulings focusing on (1) electronically downloaded software; (2) digital goods; and (3) SaaS. Please note that most states have dealt with these transactions administratively through letter rulings, policy positions, or other administrative fiat. As a consequence, these letters and rulings carry little or no authority and are constantly evolving. The following select summary is not intended to be specific tax advice related to a specific state, but to provide a general sense of the directions, often inconsistent, states have gone and may be going. Given the subject s volatility, the taxpayer and/or tax practitioner must do their own research.

Alabama The state taxes prewritten software downloaded electronically. [Ala. Admin. Code 810-6-1-.37(4).] Digital goods are treated as tangible personal property subject to sales and use tax. [ Smith d/b/a FlipFlopFoto v. Alabama Dept. of Rev., No. S. 05-1240 (Ala. Dept. of Rev., Admin. Law Div., Nov. 2006).] It does not appear that the state has issued any guidance with respect to SaaS. Arizona The sale of computer software programs generally is taxable in Arizona regardless of how the software is delivered to the customer. [See Ariz. Rev. Stat. 42-5001(16) and Ariz. Admin. Code 15-5-154(B).] The state also taxes digital goods such as music, movies, and books. [Reg. R15-5-154).] Thus, it may appear that SaaS would also be subject to tax. However, in Arizona Private Taxpayer Ruling LR04-007 (8/31/2004), the Department held that an Arizona taxpayer s license fee income derived from sales to non-arizona residents was not subject to state tax despite the fact that the software was located in Arizona. The reasoning is not clear but it appears that since the out of state purchaser never took possession of the software in Arizona, the transaction was not taxable. Therefore, it would seem that SaaS transactions where both the seller and purchaser are in Arizona are taxable, but perhaps exempt if one of the two are outside the state. Arkansas The state does not tax prewritten software that is downloaded electronically or through load and leave. [See Ark. Code 26-52-304(a)(1)(B)(ii); Ark. Code 26-53-109(a)(1)(B)(ii); and Ark. Regs. GR-25(B).] Digital goods delivered electronically where the end user has a right to permanent use are exempt from sales tax. However, if the digital goods are sold by subscription, they are taxable. [See Streamline Sales Tax Matrix, Arkansas, (9-22-2011) and Ark. Code 26-52-301(3).] It would seem that since the state does not tax software downloaded electronically, it wouldn t tax SaaS. However, since it taxes digital goods on a subscription basis, that conclusion is far from certain.

California Tax does not apply to sales of canned software or digital products that are delivered electronically or via load and leave so long as the purchaser does not receive any tangible personal property. [See Cal. Code Regs. 1502(f)(1)(D); California Sales and Use Tax Annotation 120.0531; and Cal. State Bd. of Equal., California Tax Publication 109.] Digital goods such as music, movies, and books are not tangible personal property and thus are exempt from tax. Since California does not tax software downloaded electronically or digital goods, it seems reasonable to believe that the state would not tax SaaS for the same reason, i.e., there is no transfer of tangible personal property. Colorado Colorado House Bill 1293 (effective 07/01/2012) defines tangible personal property to exclude standardized software, effectively restoring a sales and use tax exemption that was previously repealed by HB 1192 in 2010. According to HB 1293, computer software is included within the definition of tangible personal property and therefore subject to tax only (1) if it is prepackaged for repeated sale or license; (2) its use is governed by a tear-open nonnegotiable license agreement; and (3) it is delivered to the customer in a tangible medium. Thus, software is not delivered to the customer in a tangible medium if it is provided through an ASP, delivered electronically, or transferred via load and leave. Nevertheless, Colorado has taken the position that digital goods are not software and thus are subject to tax. Florida As far back as 2002, Florida ruled that it did not tax software downloaded electronically. [Technical Assistance Advisement, No. 02A-052 (11/20/2002).] In addition, the sale of information services, which is generally taxable, is not taxable if the information service is provided solely by electronic download. [Fla. Stat. 212.08(7)(v); Fla. Admin. Code 12A-1.062.] Technical Assistance Advisement 09A-044 (9/2/2009) provides that sales of canned software, electronically downloaded by the customer, are not subject to tax so long as there is no taxable transfer of tangible personal property. [See also Technical Assistance Advisement 03A-020 (4/30/2003) and Technical Assistance Advisement No. 10A-028 (6/21/2010).] The state reiterated that position in 2011 in Technical Assistance Advisement 11A-021 (07/23/2011), which provides that a taxpayer s sale of software over the Internet was not subject to

Florida sales tax where the product was delivered and installed electronically and there was no exchange of tangible personal property. Because digital goods are not tangible personal property, they are not subject to sales tax. For example, Technical Assistance Advisement, No. 11A-002 (1/13/2011) provides that video production and editing is not subject to sales tax if the product is transferred electronically; however, files transferred via a hard or flash drive, CD, or DVD are subject to sales and use tax. Given that software downloaded electronically and digital downloads are not taxable, it would appear that neither would SaaS be taxable. However, the treatment as outlined in the previous sentence is far from clear.. For example, Florida treats IaaS, to the extent it provides storage, as a lease of tangible personal property subject to tax. [Fla. Admin. Code 12A-1.032(3)] In addition, a contract that provided work stations, printers, and other hardware along with a personal, nonexclusive, and nontransferable license to use software was deemed to be taxable data processing services. The fact that title to all the equipment remained with the provider was irrelevant. [Technical Assistance Advisement, No. 91A-053 (10/9/1991).] Georgia Prewritten software and digital goods delivered electronically or via load and leave are not tangible personal property and, therefore, not subject to sales and use tax in Georgia. Since SaaS is not the sale of tangible personal property, it is not subject to sales tax. [See Georgia Taxability Matrix (9/7/2011) and Ga. Code 48-8-3(91).] Illinois In Illinois, canned or prewritten software is taxable regardless of how it is delivered. [Ill. Adm. Code 130.1935(a).] Generally, information or data that is downloaded electronically, including books, music, newspapers and magazines do not constitute the transfer of tangible personal property. [Ill. Admin. Code 130.2105(a)(3); Illinois General Information Letter ST 10-0121-GIL (12/22/2010); Illinois General Information Letter ST 10-0005-GIL (2/24/2010); Illinois General Information Letter ST 06-0071-GIL (4/19/2006).] Specifically, the state said in General Information Letter ST 07-0066- GIL (6/18/2007): [T]he true object of the transaction when purchasing a digital code is the download of an intangible, specifically electronically downloaded music or video recording files. Illinois sales and use tax is applicable to sales of tangible personal property and certain enumerated services. The longstanding policy of the Illinois Department of Revenue treats digitized content delivered solely by electronic means as a transaction which does not involve the transfer of tangible personal property and is therefore not subject to Illinois sales and use tax.

The Illinois Department of Revenue has declined to rule on the taxability of ASP or cloud computing until it receives formal guidance from the state legislature. The Department believes that the proper forum for providing guidance regarding transactions involving computer software Application Service Providers (ASPs), software hosting and web-based software is through a formal administrative rulemaking process rather than through individual inquires such as letter ruling requests. The Department at present is in the process of researching the nature and type of services and products provided in such transactions, including discussions with industry participants. The Department has found, based on the discussions to date and previous letters received by the Department, that there is no universal agreement regarding the nature of services or products that such sellers provide to their customers. Until the Department has adopted a rule on such transactions, retailers will have to determine, based on the definition contained in Section 2-25 of the Retailers' Occupation Tax Act, whether the products they provide are computer software. [See, General Information Letters ST 10-0113-GIL (12/14/2010); ST-10-0089 GIL (10/05/2010), ST-10-0103 GIL (10/29/2010), and ST-10-0077 GIL (8/23/2010).] Indiana Prewritten or canned computer software is subject to the gross receipts tax or use tax, regardless of how the software is delivered, whether through a tangible medium, via load and leave, or electronically. [See Ind. Code 6-2.5-1-27; Ind. Code 6-2.5-2-1; Indiana Letter of Findings No. 09 0746 (5/1/2010).] Indiana imposes its tax upon the sale, lease, or licensing of specified digital products transferred to or accessed by a customer within the state. See Ind. Code 6-2.5-4-16.4 and Ind. Code 6-2.5-1- 26.5. and the Indiana Taxability Matrix, (9/30/2011).] Ind. Rev. Rul. ST 09-03 (3/20/2009) provides that web-based prewritten or canned software accessed via the Internet (application service provider) is subject to tax. Iowa Prewritten software or canned delivered electronically is exempt from tax since tangible personal property delivered electronically is specifically exempt. [Iowa Code 423.3(67).] As a consequence, neither digital goods nor hosted software is not considered a taxable sale of tangible personal property because the software is delivered to a subscriber via the Internet. [See also Policy Letters 10300015 (3/29/2010) and 12300002 (1/11/2012) and the Iowa Taxability Matrix, 8/1/2011

and IA Admin Code Sec. r 731-18-34(3)).] Kansas Kansas imposes sales and use tax upon prewritten software delivered in a tangible medium, electronically, or via load and leave. [Kan. Stat. Ann. 79-3602(g); Kan. Stat. Ann. 79-3602(h); Kan. Stat. Ann. 79-3602(s); Kan. Stat. Ann. 79-3602(cc); Kan. Stat. Ann. 79-3603(s); Kan. Stat. Ann. 79-3703; Kansas Revenue Ruling 19-2004-03 (7/1/2007); Kansas Private Letter Ruling P-2010-009; Kansas Private Letter Ruling P-2010-005; Kansas Sales Tax Guideline EDU-71R (7/23/2010).] Private Letter Ruling P-2010-09 (11/16/2010) provides that electronically downloadable digitized products sold and delivered over the Internet are not taxable because they are not tangible personal property. However, prewritten or canned software is taxable regardless of the delivery method. [See also Private Letter Ruling No. P-2011-002 (5/2/2011).] Opinion Letter No. O-2010-005 (6/22/2010) provides that fees charged by application service providers (ASP) are not subject to Kansas sales tax. The nontaxable fees included recurring monthly charges, set-up fees, support, training, data migration fees, and forms programming fees. Sales tax may apply, however, if an ASP sells canned software that can be used independently of the ASP service. [See also Opinion Letter No. 0-2012-001 (2/6/2012).] Kentucky Kentucky taxes prewritten or canned software regardless of the manner that the software is delivered. [Ky. Tax Facts (9/1/2007). See also Ky. Rev. Stat. 139.010(22) and Computer Services, Inc. v. Department of Revenue, Dkt. No. 2009-CA-002012-MR (1/7/2011).] Digital goods transferred electronically are specifically taxed. [Ky. Rev. Stat. 139.200(1)(b).] It is likely that Kentucky will tax SaaS and, in informal correspondence, they have indicated they do so. [Computer Services, Inc. v. Department of Revenue, Ky. Ct. App., Dkt. No. 2009-CA- 002012-MR, (1/7/2011).] Louisiana Louisiana issued a ruling in 2010 holding that software located on a server anywhere that was available to Louisiana users and delivered in any manner was subject to the state's sales tax. Taxable transactions include, but are not limited to, remotely accessed software, information materials, and entertainment media or products, whether as a one-time use or through ongoing subscription, and whether capable of only being viewed, or being downloaded when that transfer requires payment of consideration in any form. [Louisiana Revenue Ruling 10-001 (3/23/2010)] However, the state repealed that ruling on May 23, 2011 leaving the treatment of ASP and SaaS

uncertain in Louisiana. [Louisiana Revenue Information Bulletin No. 11-010 (5/23/2011)] However, in informal correspondence the state has indicated that IaaS, PaaS, and Saas are all taxable. Maine Prewritten or canned software is tangible personal property and taxable regardless of how it is delivered. [Me. Rev. Stat. 1752(17).] According to Maine Instructional Bulletins 56 (6/12/2009) and 3 (7/28/2008), digital products are included in the definition of tangible personal property and consequently subject to sales and use tax. It doesn t appear that specific guidance on SaaS has been provided. Massachusetts A state regulation provides that sales in Massachusetts of computer hardware, computer equipment, and prewritten computer software, regardless of the method of delivery is generally subject to sales and use tax. [Mass. Regs. Code 64H.1.3(3)(a).] Digital products, other than software, that are delivered electronically, including but not limited to music, video, books or ring tones are nontaxable. [See Mass. Gen. L. Chapter 64H 1 and 2; Mass. Gen. L. Chapter 64I 2; Massachusetts Technical Information Release 05-8, (7/14/2005).] Charges for SaaS are subject to tax. [Reg. 830 CMR 64H.1.3(3), 14 and Letter Ruling 11-4.] Mass. Letter Ruling No. 08-5 (3/24/2008) held that simply accessing a website to receive data was a nontaxable service and not the transfer of a taxable license to use software. Thus, where there is no charge for the software, but just for the service other than the use of the software, the transaction is not taxable. Minnesota The Minnesota Department of Revenue has stated in a newsletter that prewritten computer software and ring tones are taxable when delivered or transmitted electronically, but other products that are taxable when sold or delivered in tangible form (such as books, training/reference materials, business forms) are not taxable when delivered electronically. [Minn. Sales Tax Newsletter No. 69 (2/1/2010).] However, the law was changed and effective for sales and purchases after September 30, 2011, ring tones, like other digital goods, are also now exempt from tax. Prewritten or canned software, regardless of how it is delivered, remains subject to sales tax. Minn. Stat. 297A.61.

Minnesota Governor Mark Dayton has proposed charging sales tax on SaaS in his 2012-13 budget. Mississippi Computer software is treated as tangible personal property and subject to tax regardless of how it was acquired. However, SaaS is not subject to tax. [See Miss. Code 27-67-3(i); 27-67-5; and Miss. Admin. Code 35.IV.5.06.] Gross income derived from the sale of specified digital products (pictures, books, movies, and music) is subject to tax. [Miss. Code 27-65-26(1).] Missouri Prewritten or canned software is generally not subject to tax in Missouri. FileNet Corporation vs. Director of Revenue (No. 07-0146, 8/20/2010) held that a database storage company was not liable for use tax on the load and leave transfer of software to a Missouri purchaser because software is not tangible personal property. Letter Rulings 5919 (11/24/2009) and 6144 (3/5/2010) hold that a taxpayer s sale of electronically delivered canned software is not subject to Missouri sales or use tax so long as there is no transfer of tangible personal property. Sales of digital products downloaded via electronic means or delivered over the Internet are not subject to Missouri sales or use tax provided there is no transfer of tangible personal property to the purchaser. [Mo. Rev. Stat. 144.020.1; Missouri Letter LR4859 (7/3/2008); Missouri Letter LR5058 (8/29/2008). See also Missouri Private Letter Ruling LR 1452 (4/3/2003).] Nevertheless, the state stated in Missouri Private Letter Ruling LR 3923 (7/19/2007) that it was still considering the taxability of digital goods. It would seem that since neither software nor digital goods delivered electronically are taxable, SaaS would seem to be exempt as well. [See also Missouri Letter Ruling LR5058 (8/29/2008).] Nebraska In Information Guide 6-5-2011 (7/27/2011), the Nebraska Department of Revenue stated that receipts from the transfer of computer software are taxable, no matter how delivered, as are related consulting services. Such services include coding, programming, and program development; software customization, testing, and upgrading; software planning and design; and systems analysis and diagnostics. In addition, service or maintenance contracts, software installation and delivery, access codes for specific video games and software training if the training is provided in Nebraska by the software retailer, are all taxable services. ASP s help desk support services, and website development and hosting services are non-taxable. However, website development is taxable if the website is transferred on a tangible storage medium to the customer. [See also, Revenue Ruling 01-10-2 (3/1/2010).]

In Revenue Ruling 01-11-3 (8/4/2011), the Nebraska Department of Revenue ruled that sales and use tax applies to sales of digital goods including books, movies, and music. [See also, Neb. Rev. Stat. 77-2701.16(9).] Access to software applications via the Internet through ASP or cloud computing is not taxable when the provider retains title to the software and does not grant a license with ownership rights to the customer. This is true regardless of the server location, in Nebraska or not. However, if the server is in Nebraska, the ASP is responsible for paying sales or use tax on its purchase of software. [Nebraska Information Guide: Sales and Use Tax Guide for Computer Software (July 2011).] Nevada Prewritten or canned software delivered electronically or through load and leave is not taxable so long as there is no other exchange of tangible personal property. [Nev. Admin. Code 372.875.] Nevada does not impose tax on the sale of digital products because they are deemed to be intangible goods. [Nev. Rev. Stat. 360B.250; 360B.420; 372.105 and 372.085.] It would seem that since neither software nor digital goods delivered electronically are taxable, SaaS would seem to be exempt as well, but specific guidance doesn t appear to have been provided. New Jersey Prewritten or canned software is not included in the definition of digital property. Rather, such software is included in the definition of tangible personal property. [N.J. Rev. Stat. 54:32B-2(g).] Receipts from sales of prewritten software that is delivered electronically and used directly and exclusively in the conduct of the taxpayer s business, trade or occupation are exempt from tax; sales of all other electronically delivered prewritten software are subject to sales and use tax. [N.J. Rev. Stat. 54:32B-8.56.] New Jersey taxes digital property, which is defined to include electronically delivered music, ringtones, movies, books, audio and video works and similar products where the customer is granted a right or license to use, retain or make a copy of such item. [N.J. Rev. Stat. 54:32B-3, 54:32B-29(VV). Amendments to the Sales and Use Tax Act, effective May 1, 2011.] Software as a Service In Letter Ruling LR: 2012-4-SUT (6/22/2012) the state held SaaS is not taxable (1) where the seller fully owns and operates the software application and the server; (2) the customers access the software via the Internet; (3) the software is not transferred to the customer; and (4) the customer does not have the right to download, copy, or modify the software. New Mexico New Mexico generally taxes all gross receipts from the sales of tangible personal property and

services including digital products. [New Mexico Ruling 401-97-6 (11/20/1997).] SaaS may be taxable because the state has ruled that annual fees paid by sales agents for use of a website were subject to New Mexico s gross receipts tax because using a license in the state to access an out-of-state website is gross receipts from licensing property in the state. [N.M. Rev. Rul. 401-10-8 (April 20, 2010).] Since the state does tax all gross receipts, not surprisingly, the state has indicated informally that IaaS, PaaS, and SaaS are all taxable. New York New York s rulings with respect to cloud computing are driven by two facts. First, the state taxes prewritten or canned software regardless of how it is accessed or delivered and second, the state taxes information services that are not personal in nature. As a consequence, ASP, SaaS, and cloud computing is often taxable where the customer is using prewritten software that is not personalized. Sales and use tax is imposed on prewritten computer software regardless of the medium or format by which it is transferred to the purchaser (including electronic delivery). [N.Y. Tax Law 1101(b)(6).] Custom software is not subject to tax. [N.Y. Tax Law 1101(b)(14).] Digital products are not considered to be tangible personal property subject to tax. [N.Y. Tax Law 1105(b); N.Y. Codes. R. & Regs. 526.7.] For example, the state ruled in TSB-A-10(27)S (6/29/10), that movies rented by a movie theatre and delivered electronically were not taxable because they are intangible. The Department has also ruled that e-books are not taxable. [See TSB- M-11(5)S (4/7/2011) and TSB-A-11(20)S (7/8/2011).] Other digitized products such as music, videos, games, photographs, and architectural drawings have also been held to be the transfer of intangibles and thus not subject to tax. [See TSB-A-99(48)S (11/12/1999); TSB-A-01(15)S (4/18/2001); TSB-A-08(22)S (5/2/2008); TSB-A-07(14)S (5/17/2007); and TSB-A-11(22)S (8/3/2011).] The state has issued numerous Advisory Opinions on software, information services, and webbased applications. The following are an instructive sampling: TSB-A-09(33)S (8/13/2009) provides that accessing and using software on servers is a taxable sale of the software. The accessing of Petitioner's software by Petitioner's customers constitutes a transfer of possession of the software, because the customer's gain constructive possession of the software, and gain the 'right to use, or control or direct the use' of the software. [See also New York Advisory Opinions No. TSB-A-09(44)S (9/24/2009).]TSB-A-10(60)S (11/24/2010).] TSB-A-10(28)S, (07/02/2010), provides that prewritten computer software is included within the definition of tangible personal property, regardless of the medium by means of which such software is conveyed to the purchaser. Tax Law 1101(b)(6). According to New York, the location of the code embodying the software is irrelevant. The accessing of the software constitutes a transfer of possession of the software. However, the taxpayer should collect the tax

based on where the software is used, which allowed the taxpayer to allocate the cost based on the number of employees using it in New York. TSB-A-10(32)S (7/23/2010) holds that a company s receipts from the sale of financial data it aggregates and then feeds to customer on a daily, weekly, or monthly basis are information services subject to New York sales tax. In addition, the taxpayer s provision of prewritten software that enables its customers to find, filter, and organize company information from the data feeds is taxable despite the fact that the customers do not download the software and only access it using a unique username and password.. TSB-A-10(44)S (9/22/2010) provides that the purchase of 3,000 licenses to use software is subject to sales and use tax in New York, but only on the number of licenses used in the state. - TSB-A-10(60)S (11/24/2010) held that an application service provider that allowed customers to classify, review, and organize documents and data for litigation support using its software was a taxable transfer of possession of the software, because the customers gain constructive possession of the software, and gain the right to use, or control or direct the use of the software. The fact that the customers did not download or otherwise received a copy of the software was deemed irrelevant. TSB-A-11(17)S (6/1/2011) provides that a hosted marketing service constituted the taxable sale of prewritten software. The taxpayer developed a software program that allowed its clients to create, manage, and delivery email campaigns based on information accumulated about their customers or prospects. The clients loaded their own data and content for analysis and were able to monitor and run reports on their marketing campaigns. According to the state: The Sales Tax Regulations provide that, in general, a sale is taxable at the place where the tangible personal property or service is delivered or the point at which possession is transferred by the vendor to the purchaser or his designee ( 20 NYCRR 526.7 [e]). The regulations further provide that, with respect to a license to use, a transfer of possession has occurred if the customer obtains actual or constructive possession, or if there has been a transfer of the right to use, or control or direct the use of tangible personal property ( 20 NYCRR 526.7 [e][4]). [C]onstructive possession of software or the right to use, or control software for purposes of Regulation section 526.7(e)(4) is determined based on the location where the client uses or directs the use of the software and not on the location of the code embodying the software (see TSB-A-08(62)S, November 24, 2008). Accordingly, the situs of Petitioner's sales for purposes of determining the proper local tax rate and jurisdiction is the location of the client's employees who use the software. If the client's employees who use the software are located both in and outside of New York State, Petitioner should collect tax based on the portion of the receipt attributable to the client's employee users located in New York. (See TSB-A- 03[5]S).

North Carolina Effective Jan. 1, 2010, canned software and digital goods are taxable regardless of whether it is delivered electronically or by load and leave. [N.C. Gen. Stat. 105-164.4(a)(6b) and 105-164.13(43a).] The state does provide an exemption for software designed to run on an enterprise server operating system, or sold to someone running a data center, cable service, telecommunications service, or providing video programming. [Computer Software Notice, (Feb. 2010).] It doesn t appear that the state has provided specific guidance on SaaS. North Dakota North Dakota imposes sales and use tax on the sale, lease, or rental of canned computer software regardless of the method or form in which it is delivered. [N.D. Cent. Code 57-39.2-02.1(1)(g) and 57-39.2-04; North Dakota Sales Tax Newsletter (March 2010).] Gross receipts from the sale of items delivered electronically, including specified digital products, are exempt from sales and use tax. [N.D. Cent. Code 57-39.2-04(54). Digital products specifically do not include prewritten or canned computer software. N.D. Cent. Code 57-39.2-04(54)(d).] It is unclear whether North Dakota taxes SaaS. Since prewritten software delivered electronically is taxable, the state may also tax SaaS. However, the state exempts the sale or lease of computer time through a terminal a position that might allow for SaaS to be tax exempt. [Rule 81-04.1-03-11(7), NDAC.] Ohio Ohio imposes sales tax upon the sale of prewritten software regardless of whether it is delivered electronically or via load and leave. [Ohio Rev. Code Ann. 5739.01(YY).] Ohio does not impose tax on the sale of digital products. [Ohio Taxability Matrix 2011, Ohio Department of Taxation, (10/17/2011).] While Ohio does not tax digital products, it does tax automatic data processing, computer services, and electronic information services. SaaS might be taxed under any one or more of those categories, but at this point, specific formal administrative or regulatory guidance is lacking.

Oklahoma In Oklahoma, a sale of prewritten software that is delivered electronically is specifically exempt from tax. [Okla. Stat. Ann. tit. 68, 1357(32).] Digital products transferred electronically are not subject to tax in Oklahoma. Digital products include, but are not limited to, software, music, video, ring tones, and books. [Streamlined Sales Tax Governing Board, Section 328 Taxability Matrix, Oklahoma; Okla. Stat. Ann. 1354(A)(4)(a)(9); Okla. Admin. Code 710:65-19-156).] Oklahoma specifically provides that the selling of electronic data processing services is exempt. [Okla. Admin. Code 710:65-19-86(a).] Given this position and the fact that software delivered electronically is exempt, it is possible that the state might rule SaaS exempt as well. Pennsylvania The retail sale or use of canned software, including updates, is subject to tax, whether the software is transferred electronically, by means of a physical storage medium, or by the load-and-leave method. [61 Pa. Code 60.19(c)(1); 61 Pa. Code 60.19(c)(2)(i); 61 Pa. Code 60.19(c)(2)(i)(C); Pennsylvania Policy Statement 60.19 (1/7/2000).] The state does not have any specific guidance with respect to digital goods. According to Letter Ruling SUT-10-005 (11/8/2010), ASP s are not taxable in Pennsylvania unless their servers or data centers are located in the state. In the ruling, the out-of-state taxpayer used its proprietary system to provide various web-based services [enabling] subscribers to have remote computer access, attend and participate in meetings online, attend online webinars, and provide attended or unattended technical computer support to the internal and external customers. Since the out-of-state taxpayer s servers were outside Pennsylvania, the hosted software was not subject to tax. However, if the server had been in Pennsylvania, the software would be taxable to the taxpayer as a provider of computer services. Pennsylvania reaffirmed the 2010 ruling in 2012 ruling again that in the case of taxable canned software accessed remotely, the taxpayer [assuming the taxpayer has nexus] is required to collect sales tax from customers when the user is located in Pennsylvania. In addition, the sale and use of software that otherwise would be subject to tax is not subject to sales tax if the end user of the software is located outside of the Commonwealth, even if the cloud server that hosts the software is located in Pennsylvania. However, if the end user is located in Pennsylvania, tax is due regardless of the location of the seller or server. [Pennsylvania Sales and Use Tax Ruling SUT-1-001 (5/31/2012).]

Rhode Island Effective October 1, 2011, the sale of prewritten software is taxable even if delivered electronically or by load and leave. [R.I. Gen. Laws 44-18-7(15); Taxability Matrix, RI Division of Taxation, (10/01/2011); R.I. Reg.SU 11-25 supersedes R.I. Reg.SU 09-25.] Digital products are not taxable in Rhode Island. [Taxability Matrix, RI Div. of Taxation (10/1/2011).] SaaS is not considered to be software downloaded electronically and is thus exempt from tax. [Reg. SU 11-25.} South Carolina Computer software that is delivered electronically is not subject to sales or use tax in South Carolina. [S.C. Code Ann. 12-36-60; S.C. Code Ann. 12-36-910.] However, in Revenue Ruling No. 05-13 (8/21/2005), the South Carolina Department of Revenue held that charges to access an ASP to use software were taxable as a communications service. Thus, software is not subject to sales tax, but to the state s communications tax. Digital products are not subject to sales or use tax in South Carolina. [S.C. Code Ann. 12-36-60; S.C. Code Ann. 12-36-910; South Carolina Revenue Ruling No. 05-13 (10/1/2005).] However, access to software as a service is subject to tax as a telecommunications service. The South Carolina Department of Revenue reiterated its position in Private Letter Ruling 10-2 (7/29/2010) holding that online subscription services provided by a Web-hosting service were subject to South Carolina sales and use tax because they qualified as communication services. In short, South Carolina doesn t charge sales tax on ASP or cloud computing access, but instead taxes it under the state s sales tax on communication services. Tennessee In Tennessee both custom and prewritten software are subject to sales and use tax regardless of the delivery method, whether through a tangible medium, via load and leave, or through electronic transfer. Tenn. Code Ann. 67-6-231(a); Tennessee Revenue Ruling 07 5; 11 38; 11 58. Tennessee law imposes sales and use tax upon the sale, lease, licensing, or use of specified digital products (music, books, movies, but not information services) transferred to or accessed by a customer within the state. Tenn. Code Ann. 67-6-233(a).

Letter Ruling No. 11-15 (6/6/2011) holds that the sale of customized shop drawings are subject to Tennessee sales and use tax if the drawings are transferred in a tangible form, but not taxable if transferred electronically. The drawings are not considered digital products and electronic transmission does not constitute a transfer of tangible personal property. Letter Ruling 11-22 (6/10/2011) ruled that a taxpayer providing a website where customers can access detailed information about various vendors either directly or through clicking on a link is not a taxable service. The fees charged by the taxpayer to the vendors for advertising, referrals, and tracking services did not constitute the sale of tangible personal property nor the sale of a taxable enumerated service. Further, the software used by the taxpayer to provide those services was not transferred or used by the customers or vendors but by the taxpayer and thus was not a sale of software. Finally, in Letter Ruling No. 11-58 (10/10/2011), the state held that there is no retail sale of tangible personal property when access to the software is only through the Web and the customer does not receive nor download any software or other tangible personal property. Texas Sales tax is due on the sale, lease, or license of computer programs whether they are prewritten or custom. However, changes or modifications to a program not sold by the person doing the change or modification are not taxable. In short, if you engage the same person who sold you the software to change or modify it, the charges for those changes are taxable. But, if you hire someone else to make those modifications, the charges for the changes will not be taxable. [Tex. Tax Code Ann. 151.009; Tex. Admin. Code 3.308(b)(2) andtex. Admin. Code 3.308(b)(4).] Finally, it doesn t matter whether the software is delivered electronically or not. Sales or use of an item in electronic form rather than physical medium does not affect item s tax status or treatment. [Tex. Tax Code Ann. 151.010; Tex. Admin. Code 3.308(b)(2).] Digital products, including photographs, books, and music are specifically treated as tangible personal property and subject to sales tax. [Tex. Policy Letter Ruling No. 200101966L, (1/3/2001).] Information and data processing services are taxable services. [Tex. Tax Code Ann. 151.0101(a)(10).] Thus, providing web-based business application software that allowed customers to manage inventory, record sales, fulfill orders, process payroll, execute accounting functions, manage employees and create financial statements is a taxable data processing service. [Tex. Policy Letter Ruling No. 200805095L (5/28/2008).] In brief, SaaS is taxable because Texas treats it as a taxable data processing service. IaaS may also be taxable in Texas. In Tex. Policy Letter Ruling No. 200908438L (8/3/2009) the state held that daily, weekly and monthly cumulative backup to tape and complete backups were taxable date processing services. In fact, in informal correspondence the state has indicated that IaaS, PaaS, and SaaS are all taxable.

Utah Sales and use tax is imposed on prewritten computer software regardless of whether the delivery is made electronically or by load and leave. [Utah Code Ann. 59-12-102(52); Utah Code Ann. 59-12-102(83); Utah Code Ann. 59-12-103(1)(m); Utah Admin. Code R865-19S-92.] Digital goods are also subject to sales tax. [Utah Taxability Matrix, Utah State Tax Commission, (9/9/2011).] A taxpayer s ASP platform that provided a software-supported service for automobile dealerships that helps automate the dealerships sales, parts, accounting and other functions, including related support, forms programming, training, data, conversion and other services, was subject to sales tax. Utah found that the software was taxable, because the contract for the ASP was essentially a personal property transaction and that the hosting of the software and customer databases in Utah was taxable as a lease or rental of server space. [Utah Private Letter Ruling No. 08-002 (6/10/2009).] However, if the SaaS provider is outside of Utah and does not have nexus with the state, the sales transactions are not taxable by Utah. [Utah Private Letter Ruling No. 08-12.] In short, it would seem that remotely accessed prewritten software (ASP or SaaS) is taxable if used in Utah, but a remote seller or SaaS provider is not required to collect the tax. Instead, the buyer is responsible for use tax on the transaction. [See also Utah Informational Publication 64 (5/1/2012).] Utah recently amended two sections of its code, Utah Code 59-12-103(113) and 59-12-211(12) that may call into question the state s earlier rulings. For example, a taxpayer providing a variety of web-based services accessed through an applet was deemed to have leased software in the state despite the fact that no software was actually transferred to the consumer. The state also rejected the taxpayer s contention that the transaction was not taxable because the software was housed on a server outside of Utah. [Utah Private Letter Ruling No. 10-011 (2/24/2012).] Finally, in informal correspondence the state has indicated that IaaS, PaaS, and SaaS are all taxable. Vermont Prewritten computer software is taxable as tangible personal property regardless of whether the prewritten software is delivered electronically or delivered via load and leave. [Vt. Stat. Ann. 1.9701(7)-2; Vt. Stat. Ann. tit. 32, 9771(1).] Digital downloads of music, books, movies, or ringtones are taxable, but not the download of photographs. [Vermont Technical Bulletin TB-54 (4/11/2011).] In an earlier version of the same Bulletin, Technical Bulletin TB-54 (9/13/2010) the Vermont Department of Revenue held that both ASP and web hosting services were taxable. However, in the 2011 Bulletin, the state reversed itself on web hosting, but not SaaS. Prewritten software that is

licensed for use and available from a remote seller is... taxable [but] neither website design nor website hosting is subject to sales tax. The state legislature recently enacted a temporary moratorium from January 1, 2007 through July 1, 2013 on the enforcement of sales tax on prewritten software accessed remotely that supersedes the Technical Bulletins. See L. 2012, H782 (5/22/2012). Virginia An exemption exists for prewritten software delivered electronically. [See Ruling of the Commissioner P.D. 99-7 (1/8/1999); P.D. 08-134 and P.D. 04-176.] If the software transfer is accompanied by any tangible personal property, it is taxable. [P.D. 11-112 (6/20/2011).] In short, software, data, and other information services delivered electronically are specifically exempted from taxation in Virginia. [Va. Code 58.1-609.5(1). See also Ruling of the Commissioner P.D. 05-44 (4/4/2005).] Downloaded music is not taxable because it qualifies as a nontaxable service. Virginia Code 58.1-609.5 1 provides that the state s retail sales and use tax does not apply to... services not involving an exchange of tangible personal property which provide access to or use the Internet and any other related electronic communication service, including software, data, content and other information services delivered via the Internet. Thus, ring tones, books, and movies are not subject to the state s sales tax. [Va. Code. 58.1-648(C).] Given that the state specifically exempts software downloaded electronically, it seems doubtful that it would attempt to tax SaaS. Washington Washington is one of the few states that has specifically addressed SaaS in statute. First, the state charges sales tax on all sales, leases, rentals, and licenses to use prewritten software. [See RCW 82.04.050 and WAC 458-20-155).] Then, the state statute specifically addresses prewritten software accessed remotely. The charges for remote access to prewritten software are taxable regardless of whether it is billed per use, per license, or on a subscription basis. [See RCW 82-04- 050(6)(b) and Tax Advisory 9002-2009 (7/24/2009).] Washington, with some exceptions, imposes sales and use tax on digital products transferred electronically to end-users. [Wash. Rev. Code 82.04.050(8)(a); see also, Excise Tax Advisory No. 9003.2010 (November 30, 2010); and Wash. Rev. Code 82.12.020(1)(e).] For example, photographers selling images to customers are taxable on those sales regardless of whether the image is delivered in print or via CD, USB drive or electronically. [ Tax Topics - Sale of Photographs (2/15/2011).]

West Virginia Sales tax applies to canned software delivered electronically and by load-and-leave. W. Va. Code 11-15B-2(b)(12); W. Va. Code 11-15B-2(b)(30). In fact, the sale of software, canned or custom, is taxable unless it is being used to process data for others, incorporated in another product for sale, or used in education. West Virginia does not impose tax on the sale of digital products transferred electronically including, but not limited to, music, video, ringtones, and reading materials. [W. Va. Code 11-15B-2b(b)(1)(B)(v).] Unlike most states, West Virginia taxes almost all services. In fact, services are presumed to be taxable, so it is no surprise that the state has indicated in informal correspondence that SaaS is taxable. [W. Va. Code 11-15-8.] Wisconsin Prewritten computer software is taxable as tangible personal property regardless of whether it is delivered to the purchaser electronically or by any other means. [Wis. Stat. 77.51(20); Wisconsin Private Letter Ruling W0921002; Wisconsin Tax Bulletin 148.] In addition, the state imposes tax on the licensing of prewritten computer programs. [Rule Sec. Tax 11.71(2).] Wisconsin sales and use tax is imposed on the sale, lease, license, rental, or use of certain digital products including books, music, or movies. [Wis. Stat. 77.51 and 77.52(1)(d); See Wisconsin Publication 240 (5/1/2012) for details.] Web hosting services are not taxable because they are not one of the state s specifically enumerated taxable services. [Tax Bulletin No. 172 (July 2011). See also Private Letter Ruling No. W 1025002 (3/24/2010).] Wyoming Canned software is subject to tax regardless of whether it is delivered electronically or by load-andleave. Wyo. Stat. 39-15-103(a)(i)(A). Effective July 1, 2010, Wyoming has enacted H.B. 29, which imposes sales and use tax on specified digital products if the purchaser has permanent use of the products. The state has not issued specific written guidance on SaaS.

As the preceding survey of state rulings makes clear, there is limited uniformity among the states with respect to ASP, SaaS and related sales and services provided in the Cloud. In fact, as indicated by the above material, most of the direction has come from policy rulings, letter rulings, and other administrative guidance. Given the evolving and changing positions of the states on these issues and the limited guidance, prudent taxpayers and tax advisers should check their respective state for the latest developments.