May 18, 2015
From KPMG TaxWatch
The New York Department of Taxation and Finance recently addressed whether a taxpayer’s cloud computing infrastructure product, which included the transfer of the right to use certain software, was subject to New York sales tax. The taxpayer provided its customers access to scalable computing capacity on taxpayer’s servers. Using this capacity, customers could run their own software applications over the Internet from taxpayer’s servers. Customers were able to select a configuration of memory, processing power, and storage to fit their needs. Customers had no physical access to the servers and could not select a specific server for their use. The taxpayer also provided customers with the right to use an operating system that allowed customers to perform minimum administrative functions such as downloading or deleting an application or searching for a file. In most instances, customers were provided free open-source operating systems, but in some instances the taxpayer licensed an operating system from a third-party. In neither case did the taxpayer separately charge customers for use of the operating system. Customers could also download free application tools or software development kits, including application programming interfaces (API). The API provided customers with commands or functions used for building software that could interact with specific applications or the operating system. The taxpayer charged its customers based on hourly rates, determined by the amount of memory, processing power, storage, and type of operating system provided to the customer.
Under New York tax law, the transfer of the right to use prewritten software is subject to sales and use tax. However, the Department noted that customers do not subscribe to the taxpayer’s cloud product to use the operating system. Rather, the product is used to run an application of the customer’s choosing using the taxpayer’s computing power. The Department concluded that the provision of computing power is not a taxable service in New York, and the taxpayer’s transfer of rights to use pre-written software (the operating system and API) was only an incidental part of the product. As a result, Department found that the taxpayer was not required to collect sales tax on the sale of its cloud computing product. For more information on Advisory Op. No. S120425A, TSB-A-15(2)S (N.Y. Dep't of Taxation and Fin. Apr. 14, 2015), please contact Dennis Prestia at (212) 872-6891 or Judy Cheng at (212) 872-3530.
For more information about TWIST or to view archived episodes, please visit our TWIST homepage.
To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.
The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.