New Jersey Issues Guidance on the Taxation of Cloud Computing

Friday, July 12th, 2013

New Jersey

New Jersey recently issued a technical bulletin on how its sales tax applies to cloud computing services. The bulletin addresses sales of Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS).

Sales of SaaS are not taxable unless the SaaS fits the definition of an information service. SaaS provides customers with remote access to software. New Jersey taxes the sale of prewritten computer software that is delivered electronically. SaaS does not include any "delivery" because the provider retains title to and possession of the software. This is therefore not a taxable sale of prewritten computer software. Because use of a software application is not listed as a taxable service, SaaS is not generally taxable as a sale of a service. However, SaaS may be taxable if it meets the definition of an information service. Information services are "the furnishing of information of any kind, which has been collected, compiled, or analyzed by the seller ... other than personal or individual information which is not incorporated into reports furnished to other people."

Sales of PaaS are not taxable. PaaS provides its customers with access to computing platforms, allowing the customers to create software using these platforms. PaaS, similarly, is not "delivered" because the provider retains title to and possession of the platforms. Therefore, the sale of PaaS is not a taxable sale of prewritten computer software. Because the use of computing platforms is not listed as a taxable service, this is not the sale of a taxable service. New Jersey sales tax therefore does not apply to sales of PaaS.

Sales of IaaS are not generally taxable. IaaS provides its customers with access to hardware, software, and any other equipment and services needed to support and manage the customers' content and dataflow. Because the software or hardware is not delivered to the customers and because the IaaS provider retains title and possession of these items, there is no taxable sale of tangible personal property. IaaS is also not a taxable service if the true object of the sale is the use of the software and supported network. Telecommunications services and utilities, however, are subject to tax. If these services are among the services provided as part of IaaS, the provider will need to either pay tax on these services or, if the provider separately states charges for these services, collect tax from its customers for these services. Presumably, if the true object of the sale is telecommunications services or utilities, the sale is subject to tax. IaaS providers should pay tax on repairs to equipment. Although the IaaS provider may pass through charges for repairs to its customers, the provider is not a reseller of the repairs. The provider should not collect tax from its customers for the repair charges.

The bulletin also notes that data housing and webhosting are not taxable services.

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TTR has a website that companies subscribe to and use daily. This website provides a list of everything that can be bought or sold in the U.S. It provides simple answers to whether buying or selling these items is taxable (subject to a sales tax or other tax), and it provides all the legal authority to support these tax answers.

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