Yesterday, the New York Department of Taxation and Finance Office of Counsel issued advisory opinion TSB-A-15(2)S holding that cloud computing vendors providing “Internet infrastructure” were not subject to sales tax. Taxpayer’s clients provided their own software to taxpayer, which ran that software for client’s purposes. Taxpayer provided hardware at data centers, including memory, processing, and storage, along with non-hardware components, such as operating systems, software development kits (SDKs), application programming interfaces (APIs), and client management consoles. Taxpayer charged an hourly rate based on the client’s hardware load and chosen operating system, along with a separately stated fee for data transfer. That business model is commonly referred to as “infrastructure as a service” (IaaS).

Previously, New York has held that cloud computing vendors offering services were subject to sales tax because such services were transfers of the right to use prewritten software. See, e.g., TSB-A-10(28)S (2010), TSB-A-11(17)S (2011), and TSB-A-13(22)S (2013). That business model is commonly referred to as “software as a service” (SaaS) or “application service provider” (ASP).

However, in the instant case, New York applied the primary purpose test and determined the object of the sale was “computing power” rather than prewritten software. Although the state also found that the operating system constituted prewritten software, it further found that its transfer was an incidental part of the service and merely enabled clients to use the “computing power.” It concluded that “computing power” was not among the list of enumerated taxable services.

The state did not determine whether SDKs, APIs, or client management consoles constituted software.