May 20, 2015
New York State’s Recent Advisory
Opinion on the Taxation of
Software as a Service (“SaaS”)
On May 15, 2015, the New York State Department of Taxation and Finance released
TSB-A-15(2)S which concluded that sales of certain cloud computing services are not subject to New
York State sales and use tax. The Advisory Opinion is noteworthy because of the Department’s position
on the taxability of licensing prewritten software.
- The Opinion was based on the unique facts of the taxpayer. The taxpayer provided Internet infrastructure
through servers and other hardware that its customers could access remotely to run business software
applications or to host a commercial website. No specific servers or hardware were dedicated to any
particular customer, the customers had no physical access to the servers or hardware, and the taxpayer
decided which servers and hardware would be used for each customer. The taxpayer did not charge customers
for operating system software. All charges were based on hourly
rates and the amount of computing power the customers consumed. Customers were not charged any fixed fees
for the service.
- The SaaS at issue was primarily for the use of taxpayer’s computing power. The Department considered
how the taxpayer advertised its offering to determine the SaaS at issue was not a taxable license to use
prewritten software. Although the operating systems offered by the taxpayer were the type of prewritten
software generally subject to tax, the Department found that the taxpayer’s customers did not subscribe
to the cloud computing service for that purpose, but rather did so primarily to use taxpayer’s computing
power to run applications. Any transfer of the right to use operating system software was found to be
only incidental to the offering.
- The Department did not address whether the taxpayer’s offering was a taxable information service.
Taxpayers should consider whether their offerings might be taxable information services. A recent case from
the Tax Appeals Tribunal held that certain data processing services provided through the use of proprietary
software applications were taxable information services. See Matter of SunGard Securities Fin. LLC, DTA
No. 824336 (N.Y.S. Tax App.Trib., Mar. 16, 2015).
- Businesses offering SaaS under even slightly different models might be treated differently.
Businesses offering SaaS in New York State should consult their tax advisors to consider the impact of
the Advisory Opinion on their particular SaaS offerings.
For further information please contact
Richard E. Nielsen, or
Michael J. Cataldo
(both in San Francisco).
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