In a pleasant surprise, the New Jersey Division of Taxation recently issued guidance saying that sales tax is not due on many cloud computing services. New Jersey’s position is contrary to a growing national trend in which many states are taking the position that cloud computing is subject to sales tax as the sale of software.
New Jersey Technical Bulletin 72 addresses three types of cloud computing services: Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS).
The Technical Bulletin says that Software as a Service is not subject to New Jersey sales tax as the sale of software, because it is not delivered in tangible form, it is not downloaded onto the customer’s computer, and title to the software is not transferred to the customer. However, the Bulletin notes that certain types of SaaS may be subject to sales tax as a taxable information service. A taxable information service is defined as:
“The furnishing of information of any kind, which has been collected, compiled, or analyzed by the seller, and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people.”
The Bulletin cites examples of taxable information services such as Westlaw™, LexisNexis®, CCH and RIA. But it would appear that many other classes of SaaS that do not involve compiling or analyzing information should not fall into the taxable information service category. This is a fact-based determination, which would require analysis on a case-by-case basis.
Similarly, the Bulletin says that Platform as a Service and Infrastructure as a Service would not be subject to sales tax because they are not the sale of tangible personal property. PaaS provides access to computing platforms, such as software and networks. IaaS arrangements that show billing for the rental of hardware (e.g., servers) are not taxable because the customer does not have possession of the equipment.
Finally, the Bulletin says that web hosting and data hosting services are not subject to New Jersey sales tax.
The position taken by the New Jersey Division of Taxation is quite favorable to customers of cloud computing services, as other states have been taking the opposite approach, saying that many of these services are taxable, including states such as New York, Pennsylvania and Vermont.
Companies that provide cloud-based computing services should determine the states in which they might have a sales tax collection obligation, and whether the services they provide are subject to that state’s sales tax.
To see the full text of this new Technical Bulletin, please visit the following link and click TB-72: http://www.state.nj.us/treasury/taxation/publtbnum.shtml.