A taxpayer’s sale of a cloud collaboration service product was subject to New York state and local sales taxes because the product is prewritten software. The purchase of hardware used to give customers access to the product would not be subject to tax if the hardware is delivered or used outside New York. If the taxpayer purchases software in New York that is intended for resale to its customers, the purchases would be exempt from sales tax.
The taxpayer’s receipts from sales of the product are receipts from the sale of prewritten computer software. The customer purchases a license to use the product from the taxpayer. Then, customers use, control, and direct the use of, the taxpayer’s software to operate their telecommunication systems. The essence of the taxpayer’s product is software.
For purposes of determining the proper local tax jurisdiction, the situs of a software license is the location associated with the license to use. The taxpayer collects tax based on the portion of the receipts attributable to its customers’ telecommunications systems located in New York. The locations can be based on information received from its customers about the location of their telecommunication systems.
In addition, charges for modifying the taxpayer’s software are not subject to sales tax. Such charges are receipts from a purchase of custom software. Under a contract with the customer, the taxpayer changes its software to allow it to:
- interact with the customer’s telecommunication system; and
- instruct the customer’s telecommunication equipment to perform various functions.
Such functions include instructing the switching apparatus on how to route a telephone call or direct a call to voice mail if the user does not answer.
However, the charges for customizing the software are exempt only if the charges are:
- reasonable; and
- separately stated on the invoice.
Further, while the taxpayer is the retail purchaser of the hardware that it uses to provide the product, it may not owe sales or use tax on those purchases. They are not subject to tax if the hardware is delivered to or used outside New York.
Finally, purchases in New York of software that is intended to be resold to customers are exempt from tax as long as:
- the taxpayer is registered for sales tax purposes; and
- timely furnishes the vendor with a resale certificate.
TSB-A-17(9)S, New York Commissioner of Taxation and Finance, July 6, 2017, ¶409-076
The Illinois Department of Revenue has also addressed the taxation of cloud services.