Pennsylvania DOR Clarifies Sales Tax Treatment of "Cloud Computing": Accessing Taxable Canned Software on Remote Servers is Taxable

Monday, June 4th, 2012


In a May 31, 2012 letter ruling, the Pennsylvania Department of Revenue (DOR) ruled that "cloud computing" is taxable. Pa. Sales & Use Tax Ltr. Rul. No. SUT-12-001 (Dept. of Revenue May 31, 2012). In what may be considered a change in position, the DOR explained that "[a]ccessing taxable canned software is taxable when the user is located in Pennsylvania."

The taxpayer that requested the ruling explained that "cloud computing" refers to "a variety of software products and services that use a server infrastructure and are accessed and used by end users using computer devices." The taxpayer described scenarios in which it uses "cloud computing." In one scenario, the taxpayer installs software on its own servers that can be accessed by its customers (the "end users" of the software). Those customers either pay a subscription fee to the taxpayer or pay the taxpayer on a per-use basis to access and use the software. Thus, the issue addressed in the letter ruling was whether accessing taxable canned software on remote servers—a form of cloud computing—was subject to sales tax.

The DOR ruled that this cloud computing scenario is taxable. Citing case law, the DOR stated that the sale of canned software or a license to use canned software are both subject to tax, even if that software is delivered electronically. See Graham Packaging Co. v. Commonwealth, 882 A.2d 1076, 1086-1087 (Pa. Cmwlth. 2005) and Dechert LLP v. Commonwealth, 922 A.2d 87, 90 (Pa. Cmwlth. 2007, aff'd, Dechert LLP v. Commonwealth, 606 Pa. 334 (2010)); see also 61 Pa. Code sec. 60.19(c)(2)(i) (stating, "The sale at retail or use of canned software, regardless of the method of delivery . . . is subject to tax."). In light of that case law and advances in technology, the DOR reasoned that "because computer software is tangible personal property, the charge for electronically accessing taxable software is taxable." Accordingly, the DOR instructed the taxpayer that when it sold to the ability to remotely access taxable canned software, the taxpayer is required to collect sales tax from its customers.

This ruling is mildly surprising because it may be considered a reversal in the DOR's position. In letter rulings in 2008 and 2010, the DOR had stated that access to software solely through the Internet is not a taxable transfer of software. See Pa. Sales & Use Tax Ltr. Rul. No. SUT-10-005 (Dept. of Revenue Nov. 8, 2010); Pa. Sales & Use Tax Ltr. Rul. No. SUT-08-005 (Dept. of Revenue Feb. 11, 2008). While these two rulings did not use the term "cloud computing," they both dealt with providing services over the Internet that entailed remote access to software. Interestingly, these two rulings are no longer available through the DOR's website.

We have recently reported on similar issues in other states. Vermont recently reversed its position on whether "cloud computing" is taxable, reported on here; in preparation for changes in sales tax law effective July 1, 2012, Colorado issued guidance about the sales tax treatment of canned software, reported on here; and Utah recently ruled that ASP software is taxable, reported on here.

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