Historically, taxing authorities have struggled to fit emerging cloud services into their existing tax regimes in an attempt to tax such services and generate additional revenues for the states. However, many states’ existing sales tax laws do not contain the express statutory authority to capture cloud services. This year, we have seen several states enact legislation specifically addressing the taxability of certain Software as a Service (“SaaS”) models. While states are not consistent in how SaaS will be taxed, or how it is defined, at least taxpayers will have some legislative guidance in states that enact such legislation.
One such state is Rhode Island. The Rhode Island Legislature promulgated H. 7200 (6/22/2018) which expressly imposes sales and use tax on “[t]he sale, storage, use or other consumption of ‘vendor-hosted prewritten computer software’”, effective October 1, 2018. “Vendor-hosted prewritten computer software” is defined as “prewritten computer software that is accessed through the Internet and/or a vendor-hosted server regardless of whether the access is permanent or temporary and regardless of whether any downloading occurs.” Previously, SaaS was not taxable in Rhode Island.
The Department has issued Advisory 2018-38 (9/4/2018) which provides an example that addresses a fact pattern where software can be purchased in a store, downloaded online or accessed on line. This example is clear, but consider a transaction where a vendor provides a SaaS model to its customers where the customer accesses the vendor’s platform, but has no ability to input data directly (the data is uploaded and processed by the vendor), and the vendor does not nor has ever sold prewritten computer software.
While Rhode Island joins a handful of states that have enacted legislation specifically addressing certain SaaS models, Rhode Island’s taxation of “vendor-hosted prewritten computer software” leaves a lot of room for interpretation.
Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:
- SaaS Taxable in Rhode Island October 1, 2018
- Texas SaaS: Text & Messaging are Taxable Data Processing Service
- SaaS Characterized as Taxable Telecommunications Service
- Pennsylvania Tax on Software Support Services: Ruling Re-issued
- Illinois Finally Rules on SaaS