Pennsylvania Position Changes on Sales and Use Taxability of Cloud Computing

The Pennsylvania Department of Revenue recently published new sales and use tax guidance related to taxability of canned software delivered through remote service in Pennsylvania Sales and Use Tax Ruling No. SUT-12-001, 5/31/2012.  This ruling extended the Deckert and Graham Packaging court decisions to “cloud computing.”  It is settled law in Pennsylvania that canned software is characterized as tangible personal property subject to Pennsylvania sales and use taxation.  This settled law generally covered software bought on tangible media, like a disc, and “shrink-wrapped” in tangible packaging.  Electronically delivered software was initially considered exempt until the Pennsylvania courts considered this question.  In the Deckert and Graham Packaging court cases, it was held that canned software, delivered electronically, to customers in Pennsylvania, is subject to Pennsylvania sales and use taxation.  However, these court decisions did not provide meaningful guidance related to the taxability of software used by Pennsylvania located customers that was accessed on a remote server outside Pennsylvania, or through a “cloud computing” arrangement with, again, the server being located outside Pennsylvania.  In this situation the software is not delivered to the user, but rather the user pays a license or subscription fee to access and use the software remotely and separately from their own computer hardware.  The Pennsylvania Department of Revenue position, before this new ruling was published, was that software accessed through a remote server was only subject to Pennsylvania sales and use taxation if the server was located in Pennsylvania.  This new ruling extends the Department’s position to impose Pennsylvania sales and use taxation on all users in Pennsylvania regardless of the location of the server being accessed.  The Department concluded:  “In light of recent case law and technological advances, the Department concludes that because computer software is tangible personal property, the charge for electronically accessing taxable software is taxable. In accessing taxable software the user is exercising a license to use the software, as well as control or power over the software, at the user's location.” 

Businesses with a “cloud computing” arrangement and that have users in Pennsylvania should be sure they are paying sales tax on their purchases or are accruing use tax and remitting tax on their own.  They cannot expect their software service provider to invoice this correctly and with the high cost of “cloud computing” license, subscription and access fees, this could be a hidden substantial and material exposure if unpaid.  Also, businesses that provide a “cloud computing” service should consider adjustment to the way they invoice Pennsylvania customers and collect and remit Pennsylvania sales tax.

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