A practical approach to sales taxes in the cloud.

• Author: Ault, William

The cloud encompasses a broad variety of computer services where purchasers obtain access to software, content, or hardware via the internet. The actual computer hardware, software, and content are maintained remotely by the service provider. Purchasers can use smartphones, laptops, and tablets to automatically obtain, on demand, hardware, server time, and network storage without human interaction. The value proposition is that purchasers no longer need to invest large amounts of capital on IT infrastructure; instead, they pay usage-based fees for access to a provider's equipment and software.

Cloud services can generally be divided into three types, which can be provided to the general public or to a private group:

* Software as a service (SaaS) or application service provider (ASP): This is software that is not loaded onto the purchaser's server, rather it is licensed from a licensor that maintains the software on the licensor's (or cloud service seller's) servers.

* Infrastructure as a service (IaaS): Also referred to as hardware as a service (HaaS), IaaS accepts any software platform and includes storage as a service.

* Platform as a service (PaaS): With PaaS, the host provides a complete software development environment including programming languages so service recipients can create their own software. In other words, PaaS provides the supporting infrastructure to enable the end user to develop proprietary solutions.

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The following discussion offers an approach to analyzing the sales and use tax implications of a purchase on the cloud.

Identify the Services Being Purchased

Analysis of the sales and use tax treatment of a purchase begins by reviewing the contract terms and conditions agreed to by the buyer and the terms set forth in an invoice. Purchasers of services are often able to remotely access, via the internet, invoicing terms and conditions governing the services. The sales tax analyst has become one more user who is able to "remotely" evaluate taxability of cloud services.

The evaluation should consider all services and focus on any references to software, data, content, data transmission, infrastructure access, hardware storage, and maintenance. For example, the following are the relevant terms, for sales and use tax purposes, found on the websites of two well-known cloud service providers:

1. Provider A: Provider A permits subscribers to purchase software and to sell access to software to other subscribers (see the exhibit for an example where Provider A has two subscribers, A and B).

   The sample contract makes numerous references to software. It provides that the subscriber must have a valid license to use any software that the subscriber stores or retrieves. The contract specifies that the software is not being sold by Provider A and that it may only be used as part of the provided services. The sample contract also sets forth terms for selling the subscriber's software on the cloud.

   The contract...