SALT Report 2715 – The New Jersey Division of Taxation issued guidance regarding the application of sales and use tax to sales of cloud computing services. Cloud computing services are those that allow a customer to access and use software that is hosted by a service provider on the provider’s servers. Cloud computing services are generally offered as three separate product categories: Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS).
Software as a Service (SaaS)
SaaS providers offer the use of software either on a per transaction basis, through a service contract, or by subscription. SaaS providers do not transfer software to their customers. Instead, SaaS providers allow customers to access the software remotely. Generally, SaaS providers obtain licenses to use the software they offer to their customers, perform regular maintenance on that software, and maintain the server space that houses the software.
Because SaaS only allows the customer to access the software remotely it is not considered a sale of tangible personal property. Specifically, because SaaS providers use the software they own or license and do not transfer software to their customers they are not considered resellers of a license to use software. As a result, the sale of SaaS is not a sale of tangible personal property; it is the sale of a service.
In New Jersey, services that are delivered into the State are taxable if they are specifically listed under N.J.S.A. 54:32B-3. The use of a software application is not listed as a taxable service. Therefore, most charges for SaaS are not subject to sales tax. However, if SaaS meets the definition of an information service it is subject to sales tax. For example, charges for SaaS in which the software is accessed and used as a tool to provide information to customers by an information service provider would be considered a taxable sale of information services.
Finally, the SaaS provider is the owner of the software and is selling access to the software rather than the software itself. Therefore, the SaaS provider must pay sales tax on its purchases of software used to provide SaaS services, except in situations where a business use exemption applies.
Platform as a Service (PaaS)
PaaS provides customers access to computing platforms. PaaS customers create software using tools and/or libraries provided by the PaaS providers. The PaaS provider provides the networks, servers, storage, and other services. Because PaaS services only provide the customer with access to the software and the software is not delivered electronically, it is not considered the sale of tangible personal property.
Additionally, PaaS providers fully retain and operate the software applications that they sell access to, and only use the software to provide the service. Therefore, the sale of PaaS is not a sale of tangible personal property; it is the sale of a service.
In New Jersey, the use of a software application or platform is not a taxable service so long as the true object of the sale is the use of the software. However, if the use and access to PaaS includes the transfer of tangible personal property, the sale of PaaS is subject to sales tax. This is true whether the software is located on a server in New Jersey or on a server outside the State.
Finally, the PaaS provider is the owner of the software and only sells access to the software rather than the software itself. As such, the PaaS provider must pay sales tax on its purchases of any software, hardware, or equipment used to provide its service, except when the business use exemption applies.
Infrastructure as a Service (IaaS)
IaaS providers purchase and maintain hardware, software, and equipment necessary to support and manage the content and data of its customers. IaaS may be purchased as part of a disaster recovery strategy, or it may it may be used to support secure transactions. As with the other cloud computing products, IaaS providers maintain ownership of the software, hardware, and other equipment purchased for use in providing the service.
Here too, IaaS providers fully retain and operate the software applications they sell. Because their customers can only access the software remotely an IaaS provider is not a reseller of a license to use the software. Therefore, the sale of IaaS is not a sale of tangible personal property; it is the sale of a service.
However, unlike the other cloud computing providers, IaaS providers sometimes include separately stated charges for the use or rental of hardware related to the service. These charges generally reflect choices made by the customer as to type, capacity, speed, or size. Although these charges are separately stated, they are considered add-ons to the customer’s IaaS arrangement and are considered part of the sales price that make up the service.
IaaS providers must pay tax on their purchases of tangible goods, telecommunications services, utilities, and charges for servicing or repairing equipment that is used in the performance of their service contracts. However, even in this scenario, the IaaS provider is not considered a reseller of these goods and services even when these purchases are passed on as a separate line item to the customer.
Finally, if an agreement for IaaS does not include the transfer of tangible personal property or taxable services performed on the customer’s property, sales tax will not apply. This is true whether the software is located on a server in New Jersey or on a server outside the State.
Sometimes sellers provide space on their server for their customers to store data. This service is called data hosting and they are not subject to sales tax because they are not specifically listed under N.J.S.A. 54:32B-3.
Webhosting services include creative services, graphics, computer coding, web traffic management, website security, and server space to house a website. Webhosting services are not subject to sales tax because they are not specifically listed under N.J.S.A. 54:32B-3.
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