Cloud computing services, both software as a service (SaaS) and infrastructure as a service (IaaS), are subject to taxes, whether your cloud provider tells you or not when you purchase them. Reid Okimoto, senior manager in the state and local tax practice at KPMG, shares tips to help you understand the real cost of cloud computing.
Q: What questions should companies buying cloud services be asking about state and local taxes?
A: One major question is, "Is it subject to sales tax?" If sales tax isn't clearly charged by the cloud provider, the customer may still be subject to 'use tax.' IT-focused professionals and their enterprises are consuming and purchasing cloud services and they're normally dealing with sellers and vendors of cloud services, not necessarily those familiar with the "taxability of services." Questions to ask the seller of the cloud services: "Are you charging sales tax or not?" If the answer is no, the next question is, "Why not?" It could be either that the provider does not have nexus or that the service is not taxable. This answer makes a difference to the consumer.
Q: So what happens with taxation and "nexus," which means a connection or link?
A: The concept of "nexus" determines who has the obligation of collecting and remitting a sales tax. Nexus is not synonymous with taxability. If the vendor has nexus in the state and the cloud service is taxable in the state, it should collect the sales tax. If not, the consumer will be responsible for self-accruing and remitting.
Q: State taxes vary, with some at 8% or even more. You note that state policies regarding taxation of cloud services also vary. Would you give us some examples?
A: New York imposes sales tax on many cloud services. California, in the majority of cases, does not tax cloud services. By contrast, a state like Washington shifts the burden of self-accruing and remitting the use tax from the cloud service provider to the consumer. States that offer multiple points of use exemptions for multi-state users of cloud services are preferred to those that impose sales tax of 100% of the purchase price based on the billing address. Imposing sales tax on 100% of the purchase price based on a billing address makes it likely that more than 100% will be taxed or nothing will be taxed. Taxpayers are always concerned about getting "whipsawed" by two competing states' taxing policies.
Q: If you don't go into this fully understanding the tax situation with cloud services, what might come back to haunt you later?
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