New York State Issues Advisory Opinion that Sale of Cloud Computing Product Was Non-taxable Service | Practical Law

New York State Issues Advisory Opinion that Sale of Cloud Computing Product Was Non-taxable Service | Practical Law

The New York State Department of Taxation and Finance issued an advisory opinion concluding that the petitioner's sale of a cloud computing "product" was not subject to sales and use tax because the product was actually a non-taxable service under the presented facts. 

New York State Issues Advisory Opinion that Sale of Cloud Computing Product Was Non-taxable Service

by Practical Law Intellectual Property & Technology
Published on 22 May 2015 • USA (National/Federal)
The New York State Department of Taxation and Finance issued an advisory opinion concluding that the petitioner's sale of a cloud computing "product" was not subject to sales and use tax because the product was actually a non-taxable service under the presented facts.
On April 14, 2015, the New York State Department of Taxation and Finance (Department) issued an advisory opinion concluding that the petitioner's sales of its cloud computing capacity were not subject to New York sales and use tax because those sales were not of pre-written computer software or other tangible personal property, but rather, of a non-taxable service (Petition No. S120425A, N.Y. Dept. of Taxation and Finance (Apr. 14, 2015)).
The petitioner offered its Infrastructure as a Service (IaaS) to customers under the following facts:
  • None of the petitioner's servers were dedicated to any particular customer, the customers had no physical access to the servers and the petitioner decided which of its servers would be used for each customer.
  • Although the petitioner provided its customers with the use of operating system software, application software interfaces (API) and application tools, it did not:
    • sublicense or allow its customers to download any proprietary software; or
    • charge customers for any software, data or other content.
  • All charges were based on the petitioner's hourly rates and the amount of server time and computing power the customer consumed, although the petitioner might charge for the customer's use of a proprietary rather than open-source operating system at a higher hourly rate. There were no fixed fees for the service.
  • The IaaS at issue was primarily for the use of petitioner's computing power.
Based on these facts and the petitioner IaaS's characterizations of its offerings in its advertisements, the Department concluded that:
  • The IaaS provider's customers' purchase its offerings of computer server capacity to run their own software applications, not to purchase any software.
  • The IaaS provider's transfer to its customers of the right to use APIs and operating system software was only incidental to the IaaS's product, which consists primarily of the sale of its computing power.
  • Because providing a customer with computing power is a service rather than a product and is not one of the services made taxable by the Tax Law, the petitioner need not collect sales tax on its sales of its cloud computing service (see NY Tax Law § 1105).
This advisory opinion, while not binding on parties other than the petitioner, is notable not only for its likely tax effect on similarly situated cloud service providers, but also for its reasoning that the IaaS at issue did not offer a software license, but rather, a service. The adoption of similar reasoning to Software as a Service (SaaS) and other cloud service providers could have far-reaching implications in other areas of the law, for example, in the determination of whether a bankrupt SaaS is a software licensor or service provider for purposes of the license saving clause under Section 365(n) of the Bankruptcy Code (11 U.S.C. § 365(n)).