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Cloud computing is still a relatively new technology. Because of its comparative novelty, states are still trying to figure out how to tax transactions that occur within the cloud computing industry.

They regularly issue new policy statements, enact new legislation, and promulgate new rules regarding the taxability of cloud-based transactions, so it can be hard for the average business owner to keep up.

Modern companies that utilize cloud-based solutions must be aware of the complexity of state sales and use tax treatment. To that end, this article will offer a basic introduction to the tax treatment of the three types of cloud computing transactions.

Software as a Service (SaaS) Taxation

The SaaS model of cloud computing allows consumers to run software applications on cloud infrastructure. Users can access the applications from web browsers or program interfaces, but they never manage or control network servers or hardware. Those looking for an example of effective SaaS solutions can find out more about cloud faxing services online.

The way that SaaS is taxed varies based on the state, but almost half of them have determined that it should be interpreted as a sale of software. In other words, using cloud-based software is usually considered the same as downloading it, so the activity may be subject to sales tax.

California is one of a handful of exceptions since as a general rule, it only imposes sales tax on tangible personal property (TPP). In CA, only two types of service activities are taxable:

1. Any service that is intrinsically tied to the sale of property.

Fabrication as a service.

When a business or individual accesses the software from a remote location, no transfer of TPP occurs, and nothing is manufactured. As a result, SaaS is thus not considered a taxable service in California.

Platform as a Service (PaaS)

The PaaS model allows consumers to use a provider’s cloud-based platform and software development tools. Customers then launch their own unique applications built on the cloud using programming languages provided by the service provider. As with SaaS, PaaS is only taxable in certain states.

There are fewer states that consider PaaS a taxable service. However, not all states have formally specified the taxability of PaaS. Vermont, for example, has issued only a fax sheet that covers exemptions for computer services and sales of intangibles but has not directly addressed PaaS.

Infrastructure as a Service (IaaS)

IaaS refers to situations where consumers use a provider’s computing resources to deploy and run software. Those resources can include servers, storage, and networks. Software can be defined as including either applications or operating systems.

As with SaaS and PaaS, IaaS customers do not manage or control hardware or software. Most states don’t consider it a taxable service, but some, like South Dakota, allow the taxation of fees to access databases, networks, or computer systems.

Sorting Through Tax Complexities

The best way by far for business owners to determine their tax liabilities when working with SaaS, PaaS, or IaaS providers is to consult a professional business tax preparer or accountant.

Even if the company partners with an outside tax consultant, it’s also important to read the fine print before signing up for any new cloud-based service.

Check to see how it is defined in the terms of use, then check with the state where the business is located to find out if the services or any fees associated with their use will be taxable.

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