The Director of the Iowa Department of Revenue issued a declaratory order regarding potential sales tax implications for virtual computing environments and electronic storage services. Amazon Web Services, Inc. (AWS), is an affiliate of Amazon.com, Inc., and offers web-based information technology infrastructure services. These services allow customers to access computing power, server bandwidth, storage, and other services without having to independently invest in physical servers, support staff, and real estate. AWS uses data centers and small clusters of servers around the world that are owned and operated by affiliates of AWS. None of the servers AWS uses are located in Iowa.
AWS petitioned the Director for a determination of whether pursuant to Senate File 2417, beginning January 1, 2019, the following three items were subject to sales tax:
– S3, an electronic storage service;
– EC2, a virtual instance computing environment service; and
– data transfer fees associated with both services.
S3 is a remote storage service that allows customers to store and retrieve varying quantities of virtual data through an internet connection. AWS’s S3 service fits squarely within the category of services the legislature intended to subject to sales and use tax when it amended Iowa Code section 423.2(6) to include paragraph (bq). Therefore, the Director concluded that S3 is a taxable storage service, subject to sales tax beginning January 1, 2019.
The EC2 service is described as “the sale of a computer related service, not the sale of a digital product.” EC2 provides computing power: a scalable virtual computing environment that customers can use to perform various functions, such as running applications, monitoring computers and computer usage, and hosting web domains. EC2 essentially provides virtual access to the functionality of computer equipment, including a computer server. According to AWS, EC2 is known within this industry as “infrastructure as a service,” or “IaaS.”
The Director agreed that EC2 offers processing power as a service, and does not constitute the sale of tangible personal property, specified digital products, or any enumerated taxable services. Therefore, the Director concluded that EC2, whether using an open-source or third-party operating system, was not subject to Iowa sales tax beginning January 1, 2019.
Data Transfer Fees
AWS asserts that the data transfer fees should be construed as a bundled transaction with S3 and EC2, and that the taxability of data transfer fees should depend on the taxability of the underlying service.
The Director concluded that data transfer fees are not “separately contracted for” and are not a separately taxable service. The tax treatment of the data transfer fees depends on the taxability of the underlying service to which they apply. Because the Director concluded EC2 is not a taxable service, data transfer fees associated with EC2 was not subject to Iowa sales tax beginning January 1, 2019. However, data transfer fees associated with the S3 service was subject to Iowa sales tax beginning January 1, 2019.
The Director declined to issue an order answering AWS’s additional request of whether its customers were exempt commercial enterprises under Iowa Code Sec. 423.3(104).
Declaratory Order 2018-300-2-0508, Iowa Department of Revenue, February 5, 2019, ¶201-408