The New York Department of Taxation and Finance (“Department”) finally got it right with at least one type of cloud computing product – infrastructure as a service (“IaaS”). The Department recently ruled in New York Advisory Opinion No. TSB-A-15(2)S, 04/14/2015, that a taxpayer providing customers with access to computing power was not subject to New York sales and use tax because the product constitutes a non-taxable service.
The taxpayer’s cloud computing product allowed customers to access computing power by selecting a configuration of memory, CPU and storage, referred to as an “instance.” The taxpayer’s customers purchased these computer instances in order to run their own software applications. In purchasing an instance, a customer is provided with an operating system that is necessary for the instance to interact with the taxpayer’s server network. The customer uses the operating system to perform certain administrative functions, such as to download an application, delete an application, or search for a file. The Department concluded that the operating system represents prewritten software. The Department noted that by granting the right to use the third-party operating system, the taxpayer is transferring the right to use prewritten computer software. However, applying a “true object” type of analysis the Department noted that a customer does not subscribe to the taxpayer’s cloud computing product in order to use the operating system. Rather, it subscribes to the product in order to run an application of its choosing using the taxpayer’s computing power. Thus, the Department concluded that the transfer of the right to use the operating system software is only an incidental part of the product, which primarily consists of the sale of the taxpayer’s computing power.
The Department applied a similar analysis to the use of application programming interfaces (APIs), which were used by customers to interact with the taxpayer’s servers. The Department reasoned that even assuming that an API constitutes prewritten software, the transfer of the right to use these APIs was an incidental part of the taxpayer’s cloud computing product, the purpose of which is to allow the customer to use the taxpayer’s computing power to run an application. Therefore, the Department ruled that because providing a customer with computing power is not one of the services made taxable by the Tax Law, the taxpayer does not need to collect sales tax on its sales of its cloud computing product.
The Department’s position with regard to IaaS is inconsistent with the policy it has taken with another cloud computing product, software as a service (“SaaS”). In taxing SaaS, the Department has often argued that a customer’s access to software constituted a taxable sale of prewritten computer software even where the customer had no actual possession or control of the underlying proprietary software used in providing the service. Although the Department could have argued in this case that the customers access to the computing infrastructure, constituted a taxable rental or lease, it did not. Perhaps the Department realized that such a conclusion would render the significant purchase of the computing infrastructure nontaxable; or perhaps it recognized that such a result is simply not supported by the law.
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Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:
- Pennsylvania Tax on Software Support Services: Ruling Re-issued
- Illinois Finally Rules on SaaS
- Tennessee’s Situsing of Accessed Software Runs Afoul
- Chicago Taxes the Cloud
- Tennessee Enacts Legislation Taxing Remotely Accessed Software