Tax Notes Newsletter

Cloud Computing: New Jersey and New York Take Divergent Paths in Sales Tax Treatment
By Sandy Weinberg, Principal
It is no surprise that state tax departments are scrambling to define their positions regarding sales taxation of cloud computing software and services. States often are behind the curve when trying to keep up with market or technology changes. For example, as the U.S. began shifting to a service economy, sales tax laws, originally addressing tangible personal property sales, lagged behind providing guidance regarding the sales of services. (Many states lists of taxable services are still being updated.) States are now forming positions regarding the sales tax treatment of cloud computing, and not all states agree. Generally, cloud computing occurs when customers use software that is hosted by a seller that owns, operates, and maintains the software. The software is not transferred (through tangible or digital media) to the buyer as it is typically housed on the sellers servers. Customers do not have the right to download, copy, or modify the software. Rather, they merely receive access to the software. New Jersey and New York are far apart with respect to sales and use tax treatment of cloud computing sales. New Jersey generally defines taxable tangible personal property to include prewritten software delivered electronically. However, the New Jersey Division of Taxation stated that because a retailer does not transfer any software to its customers, cloud computing transactions do not fit within New Jerseys definition of tangible personal property or enumerated taxable service. [N.J. Div. of Taxation Tech. Bulletin TB-72 (July 3, 2013)] As a result, New Jersey does not impose sales tax on cloud computing sales. New York, on the other hand, treats cloud computing transactions differently. The New York Department of Taxation and Finance issued an advisory opinion that cloud computing sales are taxable licenses to remotely use prewritten software. [N.Y. Dept. of Taxn. and Fin., TSB-A-11(17)S (June 1, 2011)] In short, it appears that New York subjects cloud computing sales to sales tax. However, a position may exist that a particular transaction is not subject to sales tax in New York. First, cloud computing services are not enumerated taxable services. Therefore, the question becomes whether the taxpayer is paying for a software license or a service. Second, New York tax law requires that there be a transfer of possession or control for a customer to receive a taxable license of software. As a result, a position exists that many cloud computing transactions do not transfer the needed possession or

Sandy Weinberg Principal sweinberg@odpkf.com 203.323.2400

Contact: New York, NY (midtown) 212.286.2600 New York, NY (downtown) 212.867.8000 Harrison, NY 914.381.8900 Stamford, CT 203.323.2400 Paramus, NJ 201.712.9800 New Windsor, NY 845.220.2400 Wethersfield, CT 860.257.1870

control, and are not subject to New York sales tax. Therefore, taxpayers may want to negotiate a slightly different cloud computing agreement or scrutinize their cloud computing transactions in greater detail prior to conceding that all cloud computing sales are subject to New York sales tax. In a number of states, as in New York, the facts at issue may change a conclusion since a particular transaction may not fit squarely within, or without, the states published guidance. For more information, or to discuss the sales tax treatment of your specific cloud computing, or other, transaction, do not hesitate to contact Sandy Weinberg at sweinberg@odpkf.com or your OConnor Davies tax professional.
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