In what appears to be the latest in a series of conflicting rulings issued to the same company from at least seven other states, Tennessee and South Carolina have rendered their own opinions addressing the application of sales tax to cloud collaboration service. See prior coverage here.
The company at issue maintains and operates hardware and software on servers located outside of the states issuing the tax rulings. The hardware and software is used to support its customers’ telecommunications equipment, including voice, video, messaging, presence, audio, web conferencing and mobile capabilities. The company’s customers provide their own telephone equipment and access the company’s cloud applications through the customers’ existing telecommunications, Internet or network connections obtained through third parties.
In the Tennessee ruling, the Department of Revenue explained that sales tax would apply if the cloud collaboration service constituted tangible personal property or an enumerated taxable service (i.e., telecommunications service or ancillary service). The Department characterized all components of the service as taxable telecommunications services, except messaging and conferencing, which constituted taxable ancillary services. Consistent with prior guidance, the Department stated that the cloud collaboration service did not involve the transfer of title, possession, or control of any tangible personal property (e.g., hardware or prewritten computer software) or computer software. See, e.g., Tenn. Letter Ruling No. 11-58, Oct. 10, 2011; Tenn. Letter Ruling No. 13-12, Sept. 12, 2013. However, the Department explained in a footnote that unlike other cloud computing services, the company’s service was not exempt data processing or information services because the primary purpose was not to merely access the data and information contained on out-of-state servers. The Department further classified the telecommunications components of the service as intrastate telecommunications, which are subject to a higher local tax rate. The Department reached this conclusion by focusing only on the “last mile” portion of the service performed at the customers’ premises and not considering how or from where the company provided the service.
The South Carolina Department of Revenue also concluded that the company’s cloud collaboration service constituted a taxable communications service. South Carolina imposes sales tax on the “gross proceeds accruing or proceeding from the charges for the ways or means for the transmission of the voice or messages.” Historically, the Department has broadly applied this provision to remote access software or cloud-based services, where the software or service routes (or sends) a signal of voice or messages. Because the Department determined that the company’s cloud collaboration service processes and routes telephone calls (as well as voice, video and voicemail messages, and also supports audio conferencing, video conferencing and mobility services), the Department concluded that the services were taxable communications services. Tenn. Letter Ruling 14-05 (Aug. 25, 2014, released Oct. 6, 2014). S.C. Private Letter Ruling No. 14-4 (Nov. 4, 2014, released Nov. 18, 2014).