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25th Annual Tuesday & Wednesday, January 2627, 2016 HyaƩ Regency Columbus, Columbus, Ohio Ohio Tax Workshop MM Cloud Computing … Sales Tax Implications of Sales of Services and Digital Goods Wednesday, January 27 2:00 p.m. to 3:00 p.m.

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Page 1: Workshop MM - Cloud Computing Sales Tax Implications · What Is Cloud Computing? “Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared

25th Annual 

Tuesday & Wednesday, January 26‐27, 2016 Hya Regency Columbus, Columbus, Ohio

Oh

io T

ax

Workshop MM

Cloud Computing … Sales Tax Implications of Sales of Services and Digital Goods

Wednesday, January 27 2:00 p.m. to 3:00 p.m.

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Biographical Information

Michael Twarozynski, Vice President, Finance Plex Systems, Inc., 900 Tower Drive, Suite 1400, Troy, MI 48098

248-393-8890 [email protected] Michael (Mike) Twarozynski has 26 years of finance and operations experience (over 10 years as CFO or COO) in high tech organizations such as software, telephony and electronics, most with multi-state operations. Mike has worked in very dynamic work environments: 3 high growth companies and 2 turnarounds. At Plex Systems, a manufacturing cloud company, in 2012 he managed the sale process of the company to Francisco Partners. Mike also recently successfully managed the voluntary disclosure agreement (VDA) process with 8 states and established processes for on-going state sales and use tax compliance. Mike holds a CPA and is a graduate of Michigan State University with a bachelor’s degree in accounting.

Anthony Montelisciani, Executive Director, Indirect Tax Ernst & Young LLP

1900 Scripps Center, 312 Walnut Street, Cincinnati, OH 45202 Phone 513 612.1573

[email protected] Anthony (Tony) Montelisciani is an Executive Director with 21 years of state and local tax experience. He specializes in sales, use, gross receipts and transaction tax issues affecting the healthcare, hospitality, manufacturing, construction, and printing industries. Tony manages multi-state sales and use tax audits for Fortune 500 companies, supervises automated tax refund projects, negotiates audit settlements, supports litigation and tax controversy, composes and provides technical analysis for private letter rulings, directs compliance procedures and provides tax technical training to clients, firm personnel, and other tax professionals. He also offers technical expertise in personal property tax and state income tax. Prior to starting his career in public accounting, Tony was a state income tax analyst with experience in all aspects of corporate state income taxes including filing returns, managing audits, initiating protests and implementing tax saving strategies for Fortune 500 companies. Tony is a graduate of University of Cincinnati with a Bachelor of Business Administration–Accounting Tony is a member of the Institute of Professionals in Taxation (IPT) and a Certified Member of the Institute (CMI) for Sales Tax. He is also a member of the Healthcare Financial Management Association (HFMA)

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Biographical Information

Steven E. Skiba, JD, CPA , Managing Director, State and Local Tax Services, Grant Thornton, 27777 Franklin Road, Suite 800, Southfield, Michigan 48034

248.213.4265 Fax: 248.350.3581 [email protected] Steve Skiba is a Managing Director in Grant Thornton’s State and Local Tax Practice located in Southfield (Detroit), Michigan. Steve’s practice area is state and local taxation and he has extensive experience in sales & use tax and motor fuel excise tax. Experience Steve has over 24 years of experience in state & local taxation, including 18 years in public accounting. His extensive experience includes sales & use tax and motor fuel taxation as well as state & local tax audits, mergers & acquisitions, aircraft transactions, refund recovery and utility reviews, multistate compliance, tax matrixes, tax manuals, training, nexus studies, due diligence reviews and providing sales & use tax technical research assistance in conjunction with the implementation of third party sales & use tax software solutions. Professional qualifications and memberships Steve is a member of the American Institute of Certified Public Accountants, Michigan Association of Certified Public Accountants, and the State Bar of Michigan. He is a Certified Public Accountant and Attorney licensed in Michigan. Community involvement Steve is a volunteer with United Way and through his church with the Macomb County Rotation Emergency Shelter Team (MCREST) for the home-less. Education Steve earned a Bachelor’s degree in Accounting (Summa Cum Laude) and a Juris Doctor degree from Wayne State University. Contact details

Rebecca Luck, JD, LLM, Executive Administrator, Tax Appeals Division Department of Taxation, 30 East Broad Street, 22d Floor Columbus, Ohio 43215

614-466-6750(O) 614-466-8016(D) [email protected]

Rebecca began her career with the Department of Taxation January 1, 2012 as Legal Counsel to the Division of Tax Equalization. She was promoted to Executive Administrator, Tax Appeals Division, in December, 2014. Prior to her employment with the Department of Taxation, Rebecca was an attorney examiner with the Ohio Board of Tax Appeals. As an attorney examiner, Rebecca was responsible for a hearing docket which included appeals from decisions made by county boards of revision and budget commissions, municipal income tax review boards, and the Tax Commissioner. Rebecca is versed in personal income tax, sales and use taxes, commercial activity tax, pass-through entity tax, municipal income tax as well as various aspects of real property taxation. Rebecca is a proud graduate of three Ohio Universities, Miami University (BA), the University of Akron (JD), and Capital University (LLM).

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Ohio Tax Conference January 27, 2016

Cloud Computing – Sales Tax Implications of Sales of Services and Digital Goods

Presented by:•Tony Montelisciani , Ernst & Young LLP

•Steve Skiba, Grant Thornton LLP

•Michael Twarozynski,  Plex Systems, Inc.

•Rebecca Luck, Ohio Department of Taxation

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Agenda

• What is Cloud Computing?• Sales/Use Taxability • Sales/Use Tax Nexus• Multistate Sourcing Issues • Analyzing Cloud Computing Services

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What Is Cloud Computing?

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Digital Products Products and services provided or furnished electronically via the Internet Cloud, such as:

• Cloud Computing• Software as a Service, Platform as Service, Infrastructure as a Service

• Hosted Services; e.g., searchable databases, information services, data processing services

• Streaming Digital Goods; e.g., music, movies

Introduction and Overview

Page 8: Workshop MM - Cloud Computing Sales Tax Implications · What Is Cloud Computing? “Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared

What Is Cloud Computing?

“Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or services provider interaction.”

The National Institute of Standards and Technology Definition of Cloud Computing, Special Pub. 800-145 (Sept. 2011) U.S. Commerce Department

Page 9: Workshop MM - Cloud Computing Sales Tax Implications · What Is Cloud Computing? “Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared

What are Cloud Services?

• Software as a Service (SaaS)

• Infrastructure as a Service (IaaS)

• Platform as a Service(PaaS)

• Business Process as a Service (BPaaS)

• Database as a Service (DBaaS)

• Data Storage as a Service (STaaS)

• Security as a Service (SECaaS)

• Application Programming Interfaces as a Service (APIaaS)

There are many types of activities that fall within the scope of cloud services:

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"Software as a Product" "Software as a Service"

Sales of goods and services have shifted gears …

Transition from Product to Service

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Software as a Service (SaaS)

Customer/User  accesses a software application running on the SaaS provider’s cloud infrastructure

SaaSSaaS

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Customer uses Cloud Provider’s cloud infrastructure and tools to build or deploy applications and content. Customer does not manage or control the underlying cloud infrastructure but controls its deployed applications/content. 3rd parties can access the customer’s  applications/content.

PLATFORM AS A SERVICE (PAAS)

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Infrastructure as a Service (IaaS)

Customer is provided  processing, storage, networks, and other fundamental computing resources. The customer does not manage or control the underlying cloud infrastructure but has control over operating systems, storage, and deployed applications, and possibly limited control of select networking components (e.g., host firewalls).

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Cloud Computing Product Pricing Models

• Pay‐Per‐Use• Pay‐Per‐Gigabyte Used• Monthly or Annual Subscription• Pay‐Per‐User• Revenue‐Share

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Other Digital Products 

Other product offerings furnished via the Internet Cloud include:• Information services• Searchable data bases• Movies• Songs• Videogames• Premium level subscriptions to online social 

networks

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Sales/Use Taxability

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State Positions on Digital Products/Cloud Computing

Jurisdictions may regard a transaction to be taxable because the  jurisdiction construes the transaction to be: • A taxable sale or lease of prewritten software, i.e. statutory tangible 

personal property (TPP) ‒ Constructive possession vs. physical possession 

• A Taxable lease or rental of statutory TPP despite no physical possession because server is single‐tenant server

• A digital equivalent to traditional TPP • A digital good or specific digital good• An enumerated  taxable service, e.g: 

‒ Data processing, data storage service

‒ Digital Automated Service

‒ “Canned” Information Service such as data processing or information service in the state

‒ Not an enumerated exemption from general tax on services

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State Positions on Digital Products/Cloud Computing Ohio• Automatic data processing, electronic information service, and computer services are 

considered taxable services. Ohio Rev. Code Ann. Sec. 5739.01(B)‒ Automatic data processing means processing of others' data, including providing access to 

computer equipment for the purpose of processing data

‒ Electronic information service means providing access to computer equipment by means of telecommunication equipment for the purposes of examining or acquiring data stored in or accessible to the computer equipment, or placing data into the computer equipment to be retrieved by designed recipients

‒ Personal and professional services are exempt – service provider must study, alter, analyze, interpret or adjust data or information

• Effective 1/1/14, specified digital products provided for permanent or less than permanent use are taxable 

• Electronic publishing is taxable – includes providing access to information which has been gathered and made available by a provider to the consumer in electronic format

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State Guidance on “Cloud Computing”

Ohio

Fact Intensive• Where is the tangible personal property? (in the state/outside the state)

• What is manner in which the services are provided?

• What is contained in the cloud computing agreement?‒ Types of services provided

• Where is the benefit of the service provided?

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State Guidance on “Cloud Computing”

Ohio

Examples• Subscription Services

• Inventory Advertising‒ Online Chat Features

‒ Mass Emails

• Credit Reports (not provided by a consumer credit reporting agency for purposes of the Fair Credit Reporting Act)

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State Guidance on “Cloud Computing”OhioOhio Tax Commissioner Opinion 14‐0001, Ohio Department of Taxation, February 4, 2014

• Ruled that a taxpayer that provided hosted software applications via access to the taxpayer’s computer hardware in order to support customers’ telecommunications equipment, including video, voice, messaging, presence, audio, web conferencing, and mobile capabilities, was liable for sales tax if the benefit of the cloud‐based service was received in Ohio 

• At no time did the taxpayer’s customers download or possess the software hosted by the taxpayer. The service was taxable as automatic data processing if it was used in business. 

• The commissioner determined that the cloud‐based service qualified as automatic data processing because the taxpayer provided its customers with access to computer equipment to process data.

• Furthermore, the charges for hosting services were also taxable as they were part of the price of the automatic data processing service.

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State Guidance on “Cloud Computing”Michigan

• Auto‐Owners Insurance Company v. Department of Treasury, Mich. Ct. of Appl., No. 321505, Published, (10/27/15)• The Court of Appeals held that the Court of Claims was correct in its 

determination that cloud‐based transactions were not taxable.• The Court held that the transactions would be taxable under the use 

tax act if the taxpayer had "control over a set of coded instructions that was conveyed or handed over by any means" and was not custom software for the purchaser.

• The Court of Appeals stated that not all of the software was on third‐party servers, and the lower court incorrectly narrowed the definition of 'delivered' to exclude electronic delivery.

• The Court found that the mere delivery of information that was processed using a third‐party software does not constitute delivery by any means. Where there was delivery the court used the six‐part Catalina incidental to services test to determine the taxability of the remaining transactions.

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State Guidance on “Cloud Computing”Michigan (cont.)

• Thomson Reuters v Department of Treasury, MI Court of Appeals, No. 313825, Unpublished, (May 13, 2014)• Application for Leave filed August 12, 2014 and pending with MI Supreme 

Court 

• Rehmann Robson & Co., P.C., v. Department of Treasury, MI Court of Appeals Docket No. 326177, Ct. of Claims No. 12‐000098‐MT (Nov. 26, 2014)• On Appeal before MI Court of Appeals

• GXS, Inc. v. Department of Treasury, MI Court of Appeals Docket No. 326872, Ct. of Claims No. 13‐000181‐MT (March 23, 2015) • On Appeal before MI Court of Appeals

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State Guidance on “Cloud Computing”Kentucky 

• Sales tax imposed only on tangible personal property, including downloaded prewritten computer software (KRS Sec. 139.010 & 139.200(1))• Kentucky only assesses the sales tax on tangible personal property 

which includes prewritten computer software that the customer downloads; access to prewritten computer software which is stored on a server is not subject to sales tax (Response to CCH Survey on SaaS, August 2011)

• State policy only, no formal guidance issued by Kentucky• Proposed legislation in prior years seeks to expand sales tax 

base to certain services

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State Guidance on “Cloud Computing”Indiana 

• Computer software and updates are considered tangible personal property which is taxable under IC §6‐2.5‐1‐1(a). IC §6‐2.5‐1‐27 provides that “tangible personal property” would also include “prewritten computer software” – Information Bulletin No. 8 (Revised Nov. 2011) – Accessing of prewritten 

computer software by Indiana residents constitutes a transfer of software because the customers gain constructive possession and the right to use, control, or direct the use of the software

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State Guidance on “Cloud Computing”

States SaaS Digital Products Information Services

Iowa N N N

Illinois N N N

Kansas N N N

Minnesota N Y N

Missouri N N N

Wisconsin N Y N

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True Object/Primary PurposeAnalyzing Cloud Computing Products: To Be or Not To Be Application Software

• Identifying the nature of a transaction is key to determining  taxability.  

• Form of the transaction, i.e., the contract, may or may not agree with the substance of the transaction. 

• Software tends to be involved in the provision of most digital products, but the use of application software may or may not be the true object sought by the customer/user.

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True Object/Primary Purpose

Ohio

Non‐Taxable or Mixed Transactions• Personal Services – Not an Electronic Information Service –

Ohio Adm. Code 5703‐9‐46(B)(1) – (3)– True Object Test– R.C.5739.01(Y)(2)

• Mixed Transactions Ohio Adm. Code 5703‐9‐46(B)(4)• What is contained in the cloud computing agreement?

– Types of services provided

25

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True Object/Primary Purpose

Ohio

• It's consequentiality of the tangible personal property transferred that determines taxability (Emery Industries, Inc. v. Limbach, Ohio Supreme Court, June 7, 1989 )

• When a transaction contains elements of taxable automatic data processing, computer services, or electronic information services, the "true object" of the purchaser of the services is to be considered. (Rule 5703‐9‐46(b)(4))

26

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Sales Tax Nexus

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Nexus

Traditional activities establishing nexus

• Fixed Physical presence, e.g, leased or owned facility, leased or owned tangible personal property,  or payroll

• Regular and Systematic presence of customer‐facing representative, including employees and independent contractors

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Nexus For Remote Sellers  

• To date, nexus for use tax collection purposes has required in‐state physical presence.

– However, see Alabama Ala. Admin. Code r. 810‐6‐2‐.90.03 effective 1/1/2016 which applies a Substantial Economic Presence Standard

• Traditional Sales/Use Tax Nexus Based on Entity’s activities:

– A Seller must have physical presence in the taxing state to be required to collect use tax. Quill Corporation v. North Dakota, 504 U.S. 298 (1992)

– A seller’s activities will be subject to use tax collection if the seller has physical presence in the taxing state, even if the seller's activities in the state have no relation to the transaction being taxed. National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977)

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Nexus For Remote Sellers 

• Alabama promulgated a controversial regulation that requires certain out‐of‐state retailers to collect and remit sales and use tax on sales made in Alabama, even though the retailers may not have a physical presence in the state. 

• Ala. Admin. Code r. 810‐6‐2‐.90.03 applies a Substantial Economic Presence Standard– Prior year sales of tangible personal property greater than $250,000; 

and– One of more enumerated activities including but not limited to 

soliciting orders via mail, advertising, or television broadcasting. 

• The regulation appears to contradict the U.S. Supreme Court’s holding in Quill Corp. v. North Dakota that out‐of‐state retailers must have a physical presence in a state before the state can require the retailer to collect and remit sales and use tax.

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Nexus For Remote Sellers  

• The regulation appears to be in response to US Supreme Court Justice Kennedy's concurring opinion in Direct Marketing Association v. Brohl, 135 S. Ct. 1124, 1135 (2015): 

– Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court's holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. 

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Agency Nexus 

• In Scripto v. Carson, 262 U.S. 207 (1960), the U.S. Supreme Court sanctioned the agency theory of nexus, finding that an out‐of‐state seller who used independent contractors to solicit business could be required to collect the state’s sales tax. 

• In Tyler Pipe Indus., Inc. v. Washington State Dep’t of Revenue, 483 U.S. 232 (1987), the U.S. Supreme Court ruled that representatives performing activities on behalf of a seller while physically present in a state may create sales tax nexus for a seller if such activities are significantly associated with the seller’s ability to establish and maintain a marketplace in the state for its sales. 

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“Click‐through” Nexus

“Click‐through” sales tax nexus statutes create a rebuttable presumption of agency sales tax nexus for remote sellers with third‐party e‐commerce relationships when:

• Seller solicits sales through “associates” programs with in‐state residents via website link referrals and

• Seller pays a commission or other consideration  to the in‐state resident for the sale or referral, and

• Seller has gross receipts of more than the annual statutory sales threshold.

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Enacted “Click‐through” legislation as of December 31, 2015

State Effective Date Annual Sales Threshold

Arkansas 10/24/2011 $10,000 California 9/15/2012 $10,000 Connecticut 5/4/2011 $2,000 Georgia 12/31/2012 $50,000 Illinois 1/1/2015 $10,000Kansas 10/1/2013 $10,000 Maine 9/18/2013 $10,000 Minnesota 7/1/2013 $10,000 Missouri 8/28/2013 $10,000 

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Enacted “Click‐through” legislation as of December 31, 2015 (Cont.)

State Effective Date Annual Sales Threshold

New Jersey 7/01/2014 $10,000 

New York 6/1/2008 $10,000 

North Carolina 8/7/2009 $10,000 

Rhode Island 7/1/2009 $5,000 

Vermont When 15 states adopt $10,000 

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Newly Enacted “Click‐through” legislation as of December 31, 2015 (Cont.)

State Effective Date Annual Sales Threshold

Michigan 10/1/15 $50,000 

Nevada 10/1/15 $10,000 

Ohio 7/1/15 $10,000 

Tennessee 7/1/15 $10,000 

Washington 7/1/15 $10,000 

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Enacted “Affiliate” Nexus Legislation as of December, 31 2015

State Effective DateAlabama 8/24/2012Arkansas 7/27/2011California 9/15/2012

Colorado3/1/2010

(expanded law became effective 7/1/2014)

Georgia 10/1/2012Illinois 7/1/2011Kansas 7/1/2013Maine 10/9/2013Missouri 8/28/2013New York 6/1/2008Oklahoma ($100,000 threshold) 7/1/2010

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State Effective Date

Rhode Island 7/1/2009

South Dakota 7/1/2011

Texas 1/1/2012

Utah 7/1/2012

Virginia  9/1/2013

Wisconsin 7/1/2009

West Virginia 1/1/2014

Enacted “Affiliate” Nexus Legislation as of December 31, 2015

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State Effective Date

Michigan 10/1/2015

Nevada 10/1/2015

Ohio 7/1/2015

Enacted “Affiliate” Nexus Legislation as of December 31, 2015 (Recent)

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Multistate Sourcing Issues

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Cloud Computing — Sourcing For Sales Tax 

• Software applications or digital goods: Generally the state where accessed/downloaded by “user” 

• Hosted services: – “Benefit received” 

• “Location from which the purchaser uses or directs the use of the software” 

• “Principal place of business”

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Cloud Computing — Sourcing For Sales Tax

SSTA General Sourcing Hierarchy:(Presuming no bad faith issues)

Recognized: address provided by customer’s instructions

Next recognized: address for customer in seller’s business records

Next to last recognized: customer’s address obtained during consummation of the sale 

Last recognized: address of seller’s server

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Sourcing: Sellers vs. Purchasers Generally, states hold digital products purchasers responsible for unpaid use tax when the vendor has not collected sales tax from the purchaser.  Potential reasons for vendor/seller failure to collect may include the following: • Seller may not have established nexus for sales and use tax purposes in 

the purchaser’s state; OR• Seller may have established nexus for sales and use tax purposes, but 

does not realize it, or does not have the systems to handle sales tax collection; OR

• Seller may have established nexus for sales and use tax purposes but, has not researched or does not understand the proper taxability of digital product offering; OR

• Seller may not be required to collect sales tax when the Streamlined Sales Tax Sourcing Hierarchy is applicable 

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Analyzing Cloud Computing Services for Sales/Use Tax

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Analyzing Cloud Computing Services 

STEP 1: IDENTIFY JURISDICTIONS

• Sellers: – Perform Sales Tax Nexus Study

• Purchasers:– Identify User’s Physical Locations– Consider Benefit Received Location(s)

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Analyzing Cloud Computing Services 

STEP 2: GATHER FACTS AND INFORMATION• Gather vendor agreements, review public‐facing 

information at the vendor’s website, interview process owners and users

STEP 3: ANALYZE THE SUBSTANCE• Does the product reflect the Cloud Product attributes? 

(e.g., remote access; multi‐tenancy; on‐demand pricing)• Who has access to and/or control of the product?• Does the product involve human intervention?

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Analyzing Cloud Computing Services 

STEP 4: EVALUATE THE FORM OF THE AGREEMENT• Does the form of the agreement match substance of the 

arrangement?• Does the agreement contain a grant of software license?

STEP 5: ANALYZE TAXABILITY AND SOURCING RULE• Prepare Sales Taxability Matrix (Sellers) for nexus states• Prepare Purchase Taxability Matrix (Purchasers) for user 

locations• Identify the sourcing rule for each product; (vendor’s and 

purchaser’s matrix for the same cloud product may differ) • Consider potential for exemptions

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Analyzing Cloud Computing Services STEP 6: IDENTIFY AND IMPROVE PERTINENT BUSINESS INFORMATION • Identify existing available business information to apply for 

sales (purchase) transaction sourcing• Develop improved sources of business information to apply 

for sales (purchase) transaction sourcing

STEP 7: UPDATE SYSTEMS AND PROCEDURES• Sale quotes, billing, purchase requisitions, purchase orders 

and reporting• Implement FAQ section for Sales Tax issues on internal web or 

SharePoint site• Document Multiple Point of Use (MPU) Certificates

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Opinion of the Tax Commissioner

Date Issued: February 4, 2014 Opinion No: 14-0001 Tax: Sales and Use XXXX Subject: Cloud-based Applications XXXX XXXX This request for an Opinion of the Tax Commissioner was received on February 25, 2013. It concerns the application of sales tax to cloud-based software. FACTS In your letter you provided the following facts:

XXXX is a leading multi-brand technology solutions provider to business, government, education and healthcare customers in the U.S. and Canada, providing comprehensive and integrated solutions for its customers’ technology needs through its extensive hardware, software and value-added service offerings. XXXX offers over 100,000 products from over 1,000 brands and a multitude of advanced technology solutions. Its offerings range from discrete hardware and software products to complex technology solutions such as virtualization, collaboration, security, mobility, data center optimization, and cloud computing.

As described in more detail below, XXXX offers a cloud-based service offering (the “Cloud Collaboration Service Offering” or the “Offering”) to customers nationwide. The Cloud Collaboration Service Offering will provide certain cloud-based applications and related services (the “Cloud Collaboration Services” or the “Services”) that support a customer’s telecommunication equipment, including its voice, video, messaging, presence, audio, web conferencing, and mobile capabilities. This Letter specifically requests a ruling concerning the applicability of sales and use taxes in your state to the Cloud Collaboration Service Offering.

Overview of the Cloud Collaboration Service Offering

Generally, a business’s phone systems, computers and other telecommunications equipment utilize various software applications and hardware in order to operate and function in the manner necessary for the business’s needs. For instance, although a business may have a telecommunications provider that provides it with telephone lines to make outgoing and receive incoming calls, the business will need hardware and software that internally instructs the business’s telecommunications equipment as to how to process and route those calls. Historically, customers have handled these functions internally, and such functions have not been subject to sales tax. Through the Cloud Collaboration Service Offering,

Office of the Tax Commissioner 30 E. Broad St., 22nd Floor Columbus, OH 43215 (614) 466-2166 Fax (614) 466-6401 tax.ohio.gov

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XXXX will simply be providing these non-taxable functions as a service to its customers from an offsite location.

Specifically, the Cloud Collaboration Service Offering replaces certain customer-owned and maintained software applications and related computer hardware that support a customer’s telecommunications equipment with a XXXX-hosted alternative. In this hosted alternative, XXXX owns (or is the lessee or licensee of) and maintains certain hardware and software. The benefit of the Cloud Collaboration Service Offering is that customers can utilize the hardware and software cloud applications on an as-needed basis from XXXX, thereby reducing the customer’s capital investment and on-going technology support and maintenance expenditures for such systems. The customer utilizes the hosted applications by means of the customer’s existing telecommunications, Internet, or network connections, for which it pays its own third party telecommunications provider. In essence, in exchange for a monthly fee, XXXX will operate back-office equipment and software applications that provide necessary or enhanced functionality for a customer’s phone systems and other telecommunication equipment. The customer will provide the telecommunications equipment.

XXXX will acquire, operate and maintain all the hardware and software necessary to provide the Services and ensure optimal performance. The hardware and software required for providing the Services will be installed on servers located outside Ohio. XXXX employees based outside Ohio will provide onsite professional services to maintain the hardware and software, and XXXX employees based outside Ohio will remotely monitor performance, perform necessary adds, moves, changes, and deletions, and provide troubleshooting for issues that arise during performance.

The Manner in Which the Services Are Provided

The Services will be provided by XXXX on a remote basis through the use of XXXX- owned clusters located at a XXXX data center. The clusters will deploy a variety of available XXXX-owned, client software applications that are utilized by customer-owned phones and workstations located at customer sites. As described further below, the applications generally provide the customer’s telecommunication equipment with certain necessary or enhanced functionalities.

Customers will be responsible for providing connectivity of sufficient bandwidth between the customer’s location and XXXX's data center. XXXX relies on the customer’s QoS-enabled, voice-grade Local Area Network and Wide Area Network over which it provides the Services throughout a customer’s geographic locations. Connectivity to the Public Switched Telephone Network (“PSIN”) is not included in the Cloud Collaboration Service Offering. All connections between the customer and XXXX’s data center are through a customer’s existing or newly-ordered PSTN circuits, phone lines and Internet connections. The PSTN or other connections can reside throughout the customer locations, and are terminated into the XXXX data center through customer-owned, XXXX-managed gateways. Customers are always the “customer of record” for any PSTN, Internet or other service for the transportation or transmission of messages or information; the applications do not transport or transmit messages or information. All customer communications with third parties are through customer-contracted PSTN connections that are not provided by

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XXXX. XXXX’s customers continue to communicate with third parties over the PSIN, and continue to pay their telecommunications provider the same charges and taxes for such capabilities, both before and after signing up for the XXXX Cloud Collaboration Service Offering. PSTN communications with third parties are never physically routed through XXXX's data center equipment.

XXXX may also host and deploy certain customer-owned software applications that pro-vide enhanced functionalities for a customer’s phone systems and other telecommunication equipment. Such hosted services are available as add-on services for additional fees (as described below), and are utilized by customers in the same manner as the XXXX-owned and hosted software applications.

Agreements and Monthly Charges

To purchase the Cloud Collaboration Service Offering, customers will enter into a contract with XXXX that includes a customer service order, a service description for the Offering, and a detailed pricing invoice.

Under the contract with a customer, XXXX will charge the customer a monthly user license fee, calculated based on the number of users. The monthly fee covers the charges for hardware, software, virtual server instance charges, required storage charges, rack space charges, power and cooling charges, as well as monitoring and management charges, most moves-adds changes and major version upgrades. To the extent the customer purchases add-on services (including the hosting of customer-owned software applications), separate fees are charged for each such service. Charges for maintenance and management of any customer-owned software applications are also separately stated on the monthly invoice.

Description of the Services Provided by the Embedded Software Applications

As described above, the XXXX-owned software applications available through the Offering support a customer's own voice, video, messaging, presence, audio/web conferencing, and mobile capabilities. A brief description of the supporting services provided by the various applications is set forth below:

Voice. A XXXX server, utilizing the cluster, communicates with the customer’s voice gateway device (i.e., the customer-owned switch) to provide instructions to the customer’s voice gateway device for the processing and routing of incoming and outgoing calls among the customer’s phone extensions; the call is not routed through XXXX’s server. No end-to-end communication is ever routed through XXXX’s server. This system also supports a customer’s other forms of communication to its IP endpoints, media-processing devices, VoIP gateways, mobile devices, and multimedia applications, as generally described below.

Video. Video is the technology of electronically capturing, recording, processing, storing, transmitting, and reconstructing a sequence of still images representing scenes in motion. The video support services will be provided by XXXX’s server through a cluster in the same manner as outlined above with respect to a customer’s voice communication capabilities.

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Messaging When a customer phone extension does not answer an incoming call, the XXXX server, utilizing the cluster, instructs the customer’s voice gateway device to send the call to voicemail. The voice messages are then stored on the XXXX servers and available for the user to access and manage at his or her convenience. The voice messaging support services provided by the Cloud Collaboration Service Offering will allow users to access and manage voice messages stored on XXXX-owned servers in a variety of ways, using an email inbox, web browser, or other components.

Presence. Presence support services are provided by XXXX through an application that provides users the ability to determine when colleagues are available. The application offers the flexibility of rich, open interfaces that allow enablement of instant messaging and rich, network-based presence for a wide variety of business applications. As is the case with respect to the other services, the customer’s own communications equipment accesses the application hosted on XXXX’s servers to utilize the presence capabilities.

Audio Conferencing. With respect to a customer’s audio conferencing capabilities, XXXX supports a customer-owned router and the phone devices through its hosted cluster, in a manner similar to that which is described above with respect to the voice support services.

Web Conferencing. XXXX application is an optional, subscription-based component of the Offering. This cloud-based web conferencing application permits desktop sharing through a web browser with phone conferencing and video. XXXX operates through a user’s computer or wireless device, an audio connection (either through the computer or through a phone), and a webcam (optional).

Mobility Services. XXXX supports a customer’s mobile devices through use of the application. Mobile clients utilizing an application can place and receive calls over their own corporate wireless local area network and telephony infrastructure, using XXXX’s server to instruct the routing of calls, and essentially turns a mobile phone into another extension on the cluster. XXXX’s server itself does not provide the routing for the call or otherwise function as a switch. No end-to-end communication is ever routed through XXXX’s server.

With respect to each of the support services described above, a customer utilizes the XXXX-owned and hosted software with its own equipment and through its own telecommunication, Internet or other network connection. At no time does the customer download or otherwise possess the software that is hosted by XXXX. In addition, XXXX does not provide the telecommunication, Internet or network connections necessary for the customer to utilize the Ser-vices. The net result is that the customer has done nothing more than out-source certain activities previously performed in-house that were never subject to sales tax.

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REQUESTED OPINION Given the above facts, you requested the following Opinion of the Tax Commissioner:

1. The hardware and software that XXXX purchases, leases or licenses from third parties is purchased, leased or licensed by XXXX for use or consumption and not for resale.

2. The Services provided by the Cloud Collaboration Service Offering are nontaxable services and not a lease or license of hardware or software.

3. Alternatively, if it is determined that the Cloud Collaboration Service Offering constitutes a lease, license or other transfer of software to a customer, such transfer is exempt from tax as electronically delivered software.

4. The Services provided by the Cloud Collaboration Service Offering are not taxable telecommunications services.

5. For sales and use tax purposes, the Services provided by the Cloud Collaboration Service Offering are provided in Illinois.

APPLICABLE LAW

R.C. 5739.02 levies an excise tax on each retail sale made in Ohio. R.C. 5739.01(B)(1) defines “sale” for Ohio sales and use tax purposes to include any transfer of title, possession, or a right to use tangible personal property in Ohio and certain enumerated services. One of the services designated as taxable in Ohio is “automatic data processing.” when used in business. R. C. 5739.01(B)(3)(e). R.C. 5739.01(Y)(1)(a) defines automatic data processing as follows:

“Automatic data processing” means processing of others’ data, including keypunching or similar data entry services together with verification thereof, or providing access to computer equipment for the purpose of processing data.

Another taxable service is “electronic information services” when used in business. R. C. 5739.01(B)(3)(e). This service is defined in R.C. 5739.01(Y)(1)(c) as follows:

"Electronic information services" means providing access to computer equipment by means of telecommunications equipment for the purpose of either of the following:

(i) Examining or acquiring data stored in or accessible to the computer equipment;

(ii) Placing data into the computer equipment to be retrieved by designated recipients with access to the computer equipment.

Electronic information services do not include personal or professional services. Electronic information services are sourced to Ohio if the consumer receives the benefit of the service in Ohio. See R.C. 5739.033. In other words, if the consumer is located in Ohio and accesses the electronic information service in Ohio, the transaction is a taxable Ohio sale.

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R.C. 5739.033(D)(1)(a) permits a business consumer that purchases a service who knows at the time of purchase that such service will be concurrently available for use in more than one taxing jurisdiction to provide the vendor an exemption certificate claiming multiple points of use. Upon receipt of the multiple points of use exemption certificate, the vendor is relieved of its obligation to collect and remit the sales tax due as the subscriber must pay the use tax directly to Ohio DISCUSSION The Cloud Collaboration Service Offering provides the customer with hosted software applications via access to XXXX-owned computer hardware to support the customers’ telecommunications equipment. Therefore, the Cloud Collaboration Service Offering is taxable as an automatic data processing service because XXXX is providing its customers access to computer equipment so that the customer can process data. The charges for hosting services are part of the tax base as they are charges for services necessary to complete the sale and are part of the taxable price under R.C. 5739.01(H).

The Cloud Collaboration Service Offering is taxable in Ohio if XXXX’s customer receives the benefit of the service in Ohio, i.e., customer is located in Ohio and accesses the service from their location in Ohio. If the customer will be using the service in multiple locations and provides XXXX with a multiple points of use exemption certificate, XXXX is relieves of its obligation to collect and remit Ohio sales tax on the service.

OPINION OF THE TAX COMMISSIONER Therefore, it is the Opinion of the Tax Commissioner that:

1. The software and hardware used to provide the Cloud Collaboration Service Offering is located outside of Ohio. As such, it is not used in Ohio and is not subject to Ohio use tax.

2. The Offering is taxable as an automatic data processing service, if used in business. The charge for hosting services is taxable as part of the price of the automatic data processing service.

3. The Offering is taxable in Ohio if the benefit of the service is received in Ohio. The benefit of the service is received in Ohio if the customer is located in Ohio and accesses the service from their location in Ohio.

This Opinion is limited to the legal issue addressed in this Opinion. This Opinion applies only to this Taxpayer and may not be transferred or assigned. In addition, the tax consequences stated in this Opinion may be subject to change for any of the reasons stated in R.C. 5703.53(C). It is the duty of Taxpayer to be aware of such changes. See R.C. 5703.53(E).

Joseph W. Testa Tax Commissioner