Post Wayfair Aftershocks: Top Ten Sales and Use Tax Changes – Part 5

#8: Taxation of Services

In my Post Wayfair Aftershocks: Top Ten Sales and Use Tax Changes – Part 4, we took a deeper dive into the risks of prior period audits. In this blog (Part 5), we look at the taxation of services, especially cloud-based services.

Taxation of services is expected to increase.

More and more of the nation’s GNP derives from services. And yet, services are not taxed nearly as much as tangible personal property. One such service that has grown in visibility is the taxation of cloud-based services, such as SaaS.

National Conference of State Legislatures (NCSL)

According to the National Conference of State Legislatures (NCSL), the use of cloud services has greatly increased over the past decade. As a result, states have taken a wide range of positions regarding the way they characterize cloud-based services for purposes of applying sales and use tax. Indiana is one example.

Indiana Law SEA 257

One recent example was in Indiana. Indiana Law SEA 257 now exempts software as a service from state sales tax. This makes Indiana one of only a handful of states so far to address the issue by explicit statute. The Indiana statute does just that in saying explicitly by law that although prewritten computer software delivered electronically would be taxable (section (a) below), SaaS is not (section (b) below):

(a) Except as provided in subsection (b), a person is a retail merchant making a retail transaction when the person sells, rents, leases, or licenses for consideration the right to use prewritten computer software delivered electronically.

(b) A transaction in which an end user purchases, rents, leases, or licenses the right to remotely access prewritten computer software over the Internet, over private or public networks, or through wireless media:

(1) is not considered to be a transaction in which prewritten computer software is delivered electronically; and

(2) does not constitute a retail transaction.

NCSL Recommendation on Cloud-Based Services

More states are expected to address the issue with specific legislation. To ensure that taxation is clear, efficient, and fair, the NCSL recommends that states choosing to impose a tax on cloud-based services should:

  • Avoid imposing any tax on Cloud Based Services through administrative action and only consider imposing the tax through statutory imposition;
  • Carefully draft definitions to provide clarity to buyers and sellers of Cloud Based Services;
  • Recognize the broad range of services included in Cloud Based Services and address those differences within the statutory scheme;
  • Design any tax impositions only on specific and clearly delineated services or where state statutes provide for broad taxation of services, exclusions or exemptions, if any, for certain Cloud Based Services should be clearly delineated.
  • Encourage the involvement of providers of Cloud Based Services in any drafting efforts involving the taxation or sourcing of those services; and
  • Provide clear and consistent rules to govern bundled transactions involving Cloud

Businesses Must Keep Their Eyes Open for Change

States like Indiana have taken at least taking some steps to provide some clarity along the lines of the NCSL recommendations on the issue of taxing CBSs. However, most states have yet to do so. The resulting inconsistency between the states creates further complexity and confusion that makes it difficult for businesses to understand and comply with sales and use tax rules. However, this inconsistency has created opportunities for companies that can sort out the confusion with accurate sales and use tax content and software solutions across all state jurisdictions.

Stay up to date with rapidly changing nexus standards across the country.

AUTHOR

Mark Friedlich

All stories by: Mark Friedlich

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