More light shines on state taxation of SaaS in 2015.

• Author: Ashby, Bradley H.
• Position: Software as a service

[ILLUSTRATION OMITTED]

The emergence and rapid growth of cloud-based software solutions have brought with them a fog of uncertainty over the taxability and sourcing of these offerings. Cloud-based software, commonly known as software-as-a-service (SaaS) or remotely accessed software, is a software delivery model in which software is hosted on the vendor's servers and accessed, without electronic delivery or download, by customers over the internet. The taxability of SaaS continues to evolve as states address the issue through interpretive guidance, litigation, and legislation.

At this point, a majority of states have indicated whether they consider SaaS taxable. In many of these states, tax departments have weighed in on the issue through interpretive guidance that applies existing laws that impose tax on the sale or rental of tangible personal property or data processing to SaaS transactions. In more limited cases, the issue of taxability has been litigated and addressed by courts. This past year, the Michigan Court of Appeals published an opinion finding that various SaaS offerings were not subject to Michigan's sales tax. Only a few states have adopted statutes specifically addressing SaaS transactions. This past year, Tennessee and Vermont became two such states, perhaps indicating a new trend. This item discusses the recent legislative and judicial developments from Tennessee, Vermont, and Michigan.

Tennessee

Tennessee adopted legislation, effective July 1,2015, imposing tax on remotely hosted software, making Tennessee one of only a few states to statutorily address the issue (Revenue Modernization Act, H.B. 644). Tennessee has taxed sales of computer software since 1977, periodically amending the law to address new methods by which customers are provided access to the software (e.g., electronic delivery and loaded or programmed into a computer). Prior to the recent legislation, the Tennessee Department of Revenue (DOR) had taken the position that remotely accessed software was not subject to tax unless the server on which the software resided was in Tennessee. In the preface to the new legislation, the Legislature stated its view that the statute taxing computer software was once again outdated and needed to be amended to keep up with modern business practices.

The new legislation imposes sales and use tax on the access and use of software that remains in the possession of the dealer if the customer accesses the software from a...