DIGITAL GOODS &
CLOUD COMPUTING
Jennifer Jensen
S t at e & L o cal Tax D i r ect o r P r i cew at er h o u seC o o p er s McL ean , VA
J e n n i f e r. j e n s e n @ u s . p w c . c o m
S. Matthew McNeilly
S r. Man ag er – S t at e/ L o cal Tax A maz o n . co m
S eat t l e, WA
m m c n e i l @ a m a z o n . c o m
IPT ANNU AL C ONF ERE NC E
IPT 2014 ANNUAL CONFERENCE
Helpful definition developed by National Institute of Standards & Technology:
“Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable
computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider
interaction.”
CLOUD COMPUTING – INDUSTRY OVERVIEW
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Essential characteristics:
On-demand self-service
Broad network access
Resource pooling
Rapid elasticity
Measured service
CLOUD COMPUTING – INDUSTRY OVERVIEW
IPT 2014 ANNUAL CONFERENCE
Three primary classifications:
Infrastructure as a Service (“IaaS”)
Platform as a Service (“PaaS”)
Software as a Service (“SaaS”)
More “X” as a Service models emerging regularly
Cloud computing does not include transactions that merely occur “in the cloud” such as
purchase of digital goods, streaming music or video, or in-app purchases
CLOUD COMPUTING – INDUSTRY OVERVIEW
IPT 2014 ANNUAL CONFERENCE
Understand exactly what the cloud computing service entails
Is software involved? If so, is it open source?
Is software the true object of the transaction or merely incidental?
Are other services provided?
Understand legal agreement, intent of the parties, and invoice presentation
Two different vendors may classify their nearly- identical service offerings differently
PRACTICAL CONSIDERATIONS
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Tangible personal property
Information services
Data processing
Computer services / Digital automated services
Telecommunications services
Web hosting
Remote storage service
VARYING STATE TAX APPROACHES
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SaaS / Remote access software / ASP
License may or may not be granted
No download of the software to customer’s location
Some states have concluded that there is no transfer (download) of TPP; therefore, nontaxable
For example: NJ, OK, CO
Others do not recognize this distinction and tax software the same regardless of how accessed
For example: WA
Other states tax SaaS / remote access software under a service classification
For example: CT, TX, OH, SC
OVERVIEW OF STATE TAX TREATMENT
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IaaS
Computing power
Remote storage
Both are generally viewed as nontaxable services, except in states that broadly tax computer services (e.g., CT) or data processing services (e.g., DC, TX, OH)
Note the specified exemption for remote storage services in WA
Tennessee DOR recently opined on both types of IaaS (computing power and remote storage) in LR 13-12 (both found nontaxable)
OVERVIEW OF STATE TAX TREATMENT
IPT 2014 ANNUAL CONFERENCE
Generally, sourced to the location where the customer
“uses” the services
Many states source service-based transactions subject to the same hierarchy as all other retail sales
Multiple Points of Use (“MPU”) available in some states
Local tax sourcing in origin-based states
SOURCING CONSIDERATIONS
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Michigan - Auto-Owners Insurance v. Dept. of Treasury
Access to third party software hosted remotely was properly
characterized as a nontaxable service as opposed to the sale of prewritten computer software
Taxpayer did not take “delivery” of the software
Although computer software was involved in the transactions, the taxpayer did not obtain the requisite level of control required to satisfy the definition of “use” of the software
Even if software was delivered to the taxpayer, the software was in fact “simply an incidental component of the principal transactions for the various services
RECENT DEVELOPMENTS
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Idaho
H.B. 598 takes effect July 1, 2014, and excludes from the definition of “tangible personal property” computer software that is delivered electronically; remotely
accessed computer software; and computer software that is delivered by the load and leave method where the vendor or its agent loads the software at the user’s location but does not transfer any tangible personal
property containing the software to the user
The legislation replaces and expands a partial
exemption for remote software that was enacted in 2013 via H.B. 243
RECENT DEVELOPMENTS
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Illinois
Department of Revenue recently issued a general information letter (ST 13-0074-GIL) regarding the
applicability of the state’s telecommunications excise tax to a taxpayer’s cloud-based services
Taxpayer provided a “cloud collaboration service
offering” that provided remote hosting of software that provided enhanced functionality for a customer’s phone system
The Department found that the service did not
constitute the provision of telecommunications service
RECENT DEVELOPMENTS
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Arizona
Department of Revenue recently issued a private
taxpayer ruling (LR13-006, June 25, 2013) regarding the applicability of Arizona’s transaction privilege tax to two types of offerings
The first offering allows customers to obtain and control computing capacity that is provisioned remotely
Was found to be the taxable under the rental classification
The second offering allows customers to store, retrieve, and maintain content, data, applications, and software on the taxpayer’s servers
Was found to be nontaxable
RECENT DEVELOPMENTS
IPT 2014 ANNUAL CONFERENCE
Indiana
Letter of Finding 04-20130306 (Feb. 12, 2014)
Internet-based information platforms and computer software maintained on servers outside the state, but accessed via the Internet may be taxable transfers of prewritten software.
Access of prewritten software, even if via the cloud, constitutes a taxable transfer of software because customers gain “constructive possession and the right to use, control, or direct the use of the software.”
New York
Sales of a product that provides users single sign-on access to electronic research and data from multiple sources are subject to sales and use tax because the product, in aggregating the
information, is a taxable information service. N.Y. Advisory Opinion, TSB-A-14(3)S (Jan. 27, 2014)
RECENT DEVELOPMENTS
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In 2008, 10 million ebooks were sold in the United States; in 2012 457 million ebooks were sold.
A 2013 music industry report showed that digital album sales comprised 43% of all U.S. album sales made in
the first 6 months of 2013. The same report says there were more than 50 billion audio and video streams in the US in the first six months of 2013.
Apple, Inc. recently announced that customers spent more than $10 billion in the App Store in 2013.
Customers downloaded almost 3 billion apps in December 2013 alone.
Netflix generated more than $2.7 billion in revenue from its domestic streaming segment in 2013.This
represented a 26% increase in revenue generated from that segment during 2012.
DIGITAL GOODS – INDUSTRY OVERVIEW
IPT 2014 ANNUAL CONFERENCE
Tangible personal property
Electronic delivery/digital equivalents
Streamlined Sales and Use Tax Agreement
Permanent use/streaming
Services
Digital codes/in-app purchases
STATE APPROACHES
IPT 2014 ANNUAL CONFERENCE
What is being sold?
How is it delivered or accessed? Does this affect the taxation?
Who is the buyer?
Who is the user?
Do exemptions for tangible property apply to digital property?
PRACTICAL CONSIDERATIONS
IPT 2014 ANNUAL CONFERENCE
Similar to cloud issues
Often sourced to the location where the customer “uses” or receives the product
With mobile devices, locations can constantly be changing. What is the
practical solution that states will accept?
Digital goods could be accessed in multiple jurisdictions simultaneously
Following the Mobile Telecommunications Sourcing Act?
SOURCING CONSIDERATIONS
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RECENT DEVELOPMENTS
Maine S 673, passed without Governor’s signature on 4/2/2014
New Maine legislation clarifies that the term
tangible personal property includes any product transferred electronically for Maine sales and use tax purposes.
The legislation is effective 90 days after
adjournment of the Second Regular Session of the 126th Maine Legislature.
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RECENT DEVELOPMENTS
Excise Tax Advisory No. 3189.2014, Washington Department of Revenue (3/7/2014)
The Washington Department of Revenue issued an excise tax advisory on the taxability of alarm monitoring services as a digital automated service (DAS).
If an alarm monitoring service is transferred electronically and uses one or more software applications it is subject to sales tax and retailing B&O tax as a DAS, unless the exclusion for primarily human effort applies. If an alarm monitoring service does not
have an automated component and is not transferred
electronically, it is subject to the service and other activities B&O tax.
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RECENT DEVELOPMENTS
New York Advisory Opinion TSB-A-14(1)S (1/23/2014)
The New York State Department of Taxation and Finance ruled that an e-book is not taxable as an information service, even when shared across
multiple devices or e-readers and sold with a time- limited license. The product, a study guide for a financial accreditation exam, met the definition of an e-book by meeting certain criteria.
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RECENT DEVELOPMENTS
Letter Ruling No. LR 7338, Missouri Department of Revenue (12/20/2013)
The Missouri Department of Revenue held that a sale or rental of streaming video content is not subject to sales or use tax.
The taxpayer provides a digital video streaming service where the customers purchase or rent video content which is then streamed through a variety of devices including televisions and computers.
The customer is required to have internet access, but it is not provided as part of the service. According to Missouri
regulation, sales tax only applies to the sale of canned
programs delivered in a tangible form. Therefore, the sale of digital content that is delivered over the internet is not
subject to sales tax.
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RECENT DEVELOPMENTS
Ruling of Commissioner, P.D. 13-236, Virginia Department of Taxation (12/19/2013)
Online gaming related items, including video game console points cards and video game online memberships are not subject to sales and use tax in Virginia.
The memberships and point cards are used to watch movies and television shows, listen to music, access social media, download arcade and full video games, and update games with new map packs, songs and workouts.
The Virginia Department of Taxation ruled that the points cards and memberships serve as mediums for securing access to online amenities. Since such items do not meet the definition of tangible personal property, the online
memberships and point cards are not subject to tax.
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IPT 2014 ANNUAL CONFERENCE PwC
RECENT DEVELOPMENTS
Letter Ruling 13-033, Oklahoma Tax Commission (9/16/2013 released 12/2013)
Online gaming related items, including video game console points cards, video game online memberships, and online point cards are not subject to sales and use tax in
Oklahoma.
The memberships and point cards, which are available for purchase both online and at a brick and mortar store, are used to watch movies and television shows, listen to music, access social media, download arcade and full video
games, and update games with new map packs, songs and workouts. The Oklahoma Tax Commission held that the
memberships and point cards are not subject to tax in Oklahoma, citing a rule on gift certificates.
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IPT 2014 ANNUAL CONFERENCE PwC
RECENT DEVELOPMENTS
General Information Letter GIL-13-020, Colorado Department of Revenue (8/20/2013 released on 10/24/2013)
The Colorado Department of Revenue clarified that sales of books, music and movies either in the form of paper, CD, DVD, celluloid or electronically delivered digital goods remain
subject to tax despite the reinstated exemption for electronically delivered software.
Effective July 1, 2012, the Colorado legislature modified the definition of tangible personal property to exclude
electronically delivered computer software. In the legislative declaration for this legislation, it stated that the amended definition does not alter the tax treatment of "digital goods,"
"application service providers," "software as a service," or
"cloud computing." Therefore, the Department will continue treating the sale of electronically delivered goods, such as music, movies, and books, as taxable sales of tangible
personal property.
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IPT 2014 ANNUAL CONFERENCE PwC
RECENT DEVELOPMENTS
Ohio HB 59, Laws 2013, signed by Governor 6/30/2013
As part of a large budget bill, the sales and use tax will
apply to digital products, such as electronically transferred digital audiovisual works, digital audio works, or digital
books effective January 1, 2014.
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IPT 2014 ANNUAL CONFERENCE PwC
RECENT DEVELOPMENTS
Information Guide 6-298-1990, Nebraska Sales and Use Tax for Photographers and Photofinishers, Nebraska Department of Revenue (6/19/2013)
Photographs delivered electronically, with no physical
transfer of prints, negatives, CDs, or other tangible items, are exempt from sales tax. The photographer's records must clearly indicate which photography was transferred electronically. No exemption certificate is necessary.
However, a video is taxable whether it is electronically
delivered or delivered by traditional means (for example, on a video tape cassette) because when sent electronically, it is a digital audio-visual work. Digital audio-visual works are taxable and must be taxed separately from tangible personal property.
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IPT 2014 ANNUAL CONFERENCE PwC
RECENT DEVELOPMENTS
Taxing Issues, Vol. 16, Quarter 2, Wyoming Department of Revenue (6/1/2013)
A digital code is a specified digital product, and is taxed the same as the specified digital product it is related to.
Game code cards which provide the purchaser with a code to purchase TV shows and movies, download and update games with new information as well as download new songs and workouts are taxable as a digital audio visual work.
These types of cards are taxable at the time the card is purchased, and not when the purchaser utilizes the card.
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