Neo sans pro open type layout download. Editor: Mark Heroux, J.D. 'Cloud computing' is a much- hyped tech buzzword that is nearly impossible to ignore in today's IT- driven marketplace. Startups and Fortune 500 companies are turning to the cloud at equal speed to exploit the benefits of reduced costs, scalability, and ease of use. Although three main categories of services fall under the cloud- computing umbrella, software as a service (SaaS) is currently the most common distribution model practitioners encounter. SaaS allows users to remotely access software over the internet on a subscription basis, as opposed to licensing and installing software on company- owned equipment. ![]() This seemingly simple shift from tangible delivery to remote access is fundamentally reshaping the way businesses approach IT investments. The shift to remotely accessed software and the growing popularity of SaaS have significant implications for sales and use taxes. Unfortunately, states have been slow to catch up. Regulations remain stuck in the era of tangible delivery, and practitioners are often left to rely on guidance that is limited to private letter rulings, hastily drafted bulletins, or undocumented department policies. Compliance requires careful consideration of myriad factors, including nexus, taxability, and how to source the revenues from customers. Nexus States may require a vendor to collect sales or use taxes only if that vendor's activities establish a nexus or minimum connection with the state. IT providers have heralded software-as-a-service (SaaS) as an excellent complement to on-premises software addressing the shortcomings of previous on-demand software solutions such as application service provision (ASP). If this connection is established, the vendor is subsequently compelled to collect the requisite tax from the purchaser and remit the tax to the state. Cloud- computing vendors must consider server location in determining nexus risk. Placing a server in a state generally creates a physical presence within that state, resulting in nexus. Other nexus- creating activities include placing employees; physically soliciting sales; and performing various installation, customization, or training activities in the state. States have enacted laws attempting to extend nexus to vendors lacking the typical in- state physical presence of employees, agents, independent contractors, or property. These laws rely on click- through, affiliate, related- party, and controlled- group nexus theories. Cloud- computing vendors should refer to the typical physical presence and alternate bases of nexus when determining whether they have sales tax responsibilities to a particular state. (For more on this, see ' and ') Some states may characterize SaaS transactions as taxable sales of tangible personal property, often by defining them as licenses or sales of prewritten computer software. Thus, selling SaaS to an out- of- state customer, where a vendor grants a software license, may be interpreted as the vendor's being deemed to own tangible property in the state where the customer is located. This position could lead state revenue authorities to assert that vendors have nexus in states where they otherwise would not under a traditional physical presence test. Taxability of SaaS After determining nexus, sellers and consumers must tackle the potentially overwhelming question of whether a particular state subjects SaaS to sales and use tax. States broadly interpret their sales- and- use- tax statutes as they apply to SaaS transactions and either (1) explicitly enumerate that SaaS receipts are a taxable service; (2) view the sale of SaaS as the taxable electronic delivery or constructive possession of prewritten software (i.e., tangible personal property); or (3) consider SaaS as within the definition of a particular taxable service. In states in which services are not taxable, or specifically enumerated, the analysis becomes whether the SaaS transaction represents a purchase of tangible personal property. Some states may treat SaaS as a taxable acquisition of tangible personal property, while other states may consider it a service, rendering the sale not taxable unless specifically enumerated. Additionally, careful attention should be given to states that do not tax or that exempt information services, as SaaS transactions can often be classified as such.
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