CCH Tax Day Report
The Rode Island Division of Taxation has issued a declaratory ruling regarding whether an information technology infrastructure services company’s sales of certain cloud computing services and fees are subject to sales tax. Specifically, the ruling held that the taxpayer’s storage service, computing service with an open source instance, computing service with a third party instance, and data transfer fee are not subject to sales tax.
Storage service: The taxpayer’s remote storage service allows customers to store and retrieve content, data, applications, and software on its servers. When a customer buys the taxpayer’s storage service, he or she pays for digital storage space for data, applications, and software. The customer does not buy any tangible personal property, prewritten computer software, or specifically enumerated taxable services. The storage service may look similar to a telecommunications service because it involves “the electronic transmission, conveyance, or routing of… data… or any other information or signals to a point, or between or among points.” However, in general, telecommunications services refer to the transmission of telephonic messages, not the storage of data. Storage service customers do not use the storage service primarily to route voice and other data between locations. Instead, the storage service is more like “data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser where such purchaser’s primary purpose for the underlying transaction is the processed data or information.” Such services are not telecommunications services. Customers who purchase the storage service primarily do so to store data, not to route communications to other individuals. Customers may buy more or less digital storage space on the storage service as needed for a base fee. Customers may even use free optional software development kits and/or a management console to help upload and manage the data they want to store. However, none of these items falls into a taxable category. Therefore, the storage service is not subject to sales tax.
Computing service with an open source instance: The computing service, called Iaas (remote access to computing capacity and control of computing resources) does not involve the sale of tangible personal property. In lieu of purchasing hard drives, servers, and other computing equipment, computing service customers only purchase a configurable instance (combination of memory, CPU, storage, and operating system) in the cloud with access to a basic operating system. The taxpayer’s customers then use these instances to perform the work they want to accomplish. Customers receive no physical copies of any software. Nor does the computing service involve the sale of prewritten computer software, even though an operating system qualifies as prewritten computer software. The taxpayer does not separately license, sell, or transfer any software with its computing service. Nor do the taxpayer’s customers download any software as part of an instance. The taxpayer’s software licensing agreements with third party software vendors explicitly prohibit the taxpayer’s customers from downloading or receiving operating system software. This software runs on servers within the taxpayer’s network to provide computing service. Customers have no physical access to or control over the taxpayer’s server that runs the operating system hardware. They can only use the operating system software in conjunction with the computing service. The computing service is also not an explicitly enumerated service. Even if the computing service involved the sale of a vendor’s platform to host software (SaaS), such a service is not taxable as long as prewritten computer software is not downloaded. The computing service is also not a taxable telecommunications service because its primary purpose is processed data or information. The primary purpose of the computing service is remote access to computing power for running applications, monitoring computers, hosting web domains, and other functions that computers can perform. Further, the computing service is not a bundled transaction. The taxpayer’s customers pay for access to computing power, not two or more distinct, identifiable products for a non-itemized price. An operating system does not count as an item that is purchased with the computer power. Customers do not purchase or download the operating systems on the taxpayer’s servers. However, even if the computing service was considered a bundled transaction, the real object test suggests that the primary purpose of a computing service transaction is access to computing power, not the sale of prewritten computer software. Therefore, computing service with an open source instance is not subject to sales tax.
Computing service with a third party instance: For the same reasons that computing service with an open source instance is nontaxable, so is computing service with a third party instance. It makes no difference for tax purposes that a third party instance costs customers more than an open source instance because of the taxpayer’s licensing expenses and the additional support that third party instances require. The operating systems that customers use for computing service are licensed by the taxpayer, not its customers. Customers do not receive a license to use the operating system, or any other, software; they do not receive a physical copy of any software; and they cannot electronically download the operating system software for their own use. The taxpayer does not separately license, sell, or transfer any software with the computing service. Therefore, the computing service with a third party instance is not subject to sales tax.
Data transfer fees: Data transfer fees are not a particular taxable service. These fees are a means of tracking a customer’s usage of the taxpayer’s cloud services. Data transfer fees are separately listed on each customer’s bill, but they are directly related to his or her storage service and computing service usage. For storage service, data transfer fees apply when customers request access to computer equipment to store data and then later access or retrieve that same data. For computing service, data transfer fees apply when customers request access to computer power in different data centers. Data transfer fees are also not fees for telecommunication services. Therefore, data transfer fees are not subject to sales tax.
Declaratory Ruling Request No. 2017-02, Rhode Island Division of Taxation, March 31, 2017, ¶200-883