On May 15, 2015, the New York Department of Taxation and Finance determined in Advisory Opinion TSB-A-15(2)S that the sale of certain cloud computing services were 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. 

  1. The Opinion was based on the unique facts of the taxpayer.  The taxpayer ("Supplier") offered Software as a Service ("SaaS").  No specific servers of the Supplier were dedicated to any particular customer, the customers had no physical access to the servers, and the Supplier decided which of its servers would be used for each customer.  Customers were not charged by the Supplier for operating system software, and all charges were based on hourly rates and the amount of computing power consumed.  Customers were not charged any fixed fees for the service.
  2. The SaaS at issue was primarily for the use of Supplier's computing power.  The Department considered how the Supplier 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 Supplier were the type of pre-written software generally subject to tax, the Department found that the Supplier's customers did not subscribe to the cloud computing service for that purpose, but rather did so primarily to use Supplier'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.
  3. The Department did not address whether the Supplier's offering was a taxable information service.  Suppliers should consider whether their offerings might be taxable information services, and review the recent SunGard case from the Tax Appeals Tribunal in that regard.  (See Matter of SunGard Securities Fin. LLC, DTA No. 824336 (N.Y.S. Tax App. Trib., Mar. 16, 2015).)
  4. Businesses offering SaaS under even slight different models might be treated differently.  Suppliers offering SaaS in New York should consult their tax advisors to consider the impact of the Advisory Opinion on their particular SaaS offerings.