The Sales And Use Taxation Of Software - Software Accessed From The Cloud

Since software was first invented, state tax authorities and taxpayers have spent a considerable amount of time and resources to determine its sales and use taxation. With the introduction of the "Software as a Service" distribution model, the taxation of software has become increasingly complex.

Software Taxation – Evolutionary Background:

States initially struggled with whether software was tangible personal property, and thus, should be subject to sales and use taxation or was intangible personal property and thus, exempt from taxation. States have eventually concluded that for sales and use taxation purposes, the sale of prewritten software programs (a.k.a. "canned" or "shrink-wrapped" software vs. "custom" software) that reside on a tangible storage medium, such as a CD-ROM (formerly a floppy disk), should be considered taxable. States argued that software should not be treated differently than the sale of any other tangible medium, such as a book or a record album, which incorporate intangibles. Although all of the value of the purchase is within the intangible, i.e., the author's writing or musician's music, states have concluded that software should be similarly taxable if it is carried on a tangible storage medium. The District of Columbia and every state imposing a sales tax subjects the sale of prewritten software to taxation.

In addition, many states hold that software transferred via the load and leave method should be treated as the transfer of tangible personal property subject to sales and use taxation, even though no tangible medium is left behind. Furthermore, many states have passed laws that taxes electronically downloaded software as the transfer and possession of tangible personal property.

Cloud Computing – Sales and Use Taxation:

The latest evolution of accessing prewritten software is now within the so called "cloud". "Software as a Service" ("SaaS" transaction) is a recent software distribution model in which software applications are hosted by a service provider on its server and made available to customers over the internet. In other words, the purchaser does not take possession of the software either through a tangible storage medium or via a download of some fashion but rather only has access to it. As a result of this latest technological advancement, state tax authorities have been presented with a new dilemma: when software is accessed from the cloud, has the software been transferred in some manner to the...

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