New York: exempt cloud services

For better or worse, technology is changing our lives. We slowly adapt to each new innovation, be it the map app on our phones or the camera in our ovens (how did we ever cook without it?). So, too, must sales and use tax laws adapt — and perhaps nowhere is this more evident than in the world of cloud computing.

The sale of tangible personal property is subject to tax in 45 states and the District of Columbia (local sales taxes may apply in Alaska and Montana, which lack state sales taxes). Certain services are also subject to tax in many states (learn more about the taxation of services). Where do cloud computing services fit in?

Under New York Tax Law § 1101(b)(6), “tangible personal property” includes “pre-written computer software, whether sold as part of a package, as a separate component, or otherwise, and regardless of the medium by means of which such software is conveyed to a purchaser.” Also taxable:

• The service of collecting, compiling or analyzing information
• The furnishing of reports on the above information to other persons
• The service of storing tangible personal property not held for sale in the regular course of business (§ 1105(c)(1), (4), (9))

This is all good information, but knowing it isn’t enough to determine taxability.

Taxpayers who deal in cloud computing must examine the services (and tangible personal property, if applicable) they provide in order to determine taxability. When in doubt, it’s best to seek the advise of a tax advisor or the New York State Department of Taxation and Finance.

In a recent advisory opinion, for example, the department concluded that the charges for a specific taxpayer’s services are not taxable due to the following:

• Data storage services are not subject to sales tax
• No information service is provided (users can only access their own information)
• No tangible personal property is stored
• The software is available to all users, including those using a free subscription
• Users can access the service through any web browser

It’s important to note that an advisory opinion is “limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts.” Services provided by another taxpayer may have been found taxable.

It’s also worth noting that taxability laws differ from state to state. Businesses with clients in multiple states may find that services that are exempt in State A are taxable in State B.

Sales tax software (SaaS) facilitates sales and use tax compliance in all states. Learn more.