Pennsylvania wants to tax the Cloud

Tom Paine

The Pennsylvania Department of Revenue issued a new letter ruling on May 31 (Sales and Tax No. SUT-12-001(pdf)) stating that a Pennsylvania user accessing cloud software over the Internet is subject to sales or use tax. The ruling states that accessing “canned software” on remote servers is subject to sales or use tax, as long as the user is based in Pennsylvania, no matter where the software or servers are located. The logic behind the ruling is that using cloud software from a Pennsylvania location is the same as the purchase of tangible personal property in the state.

The ruling appears to reverse a 2010 ruling that stated "access to software solely through the Internet is not a taxable transfer of software unless the server or data center resides in Pennsylvania". That ruling is no longer on the Department of Revenue's website.

Pennsylvania becomes the nineteenth state that tries to tax remotely accessed software.

The Supreme Court of Pennsylvania decided in 2010 (Dechert LLP v. Commonwealth of Pennsylvania) that "canned" software was subject to the sales tax regardless of the method of delivery, and that may have been part of the legal basis for the Department of Revenue's new ruling on cloud software. I'm not an attorney nor do I play one on the Internet, but it is not absolutely clear that Dechert applies to cloud software, and thus there may be legal challenges to this ruling. This ruling may apply a tax not only to enterprise cloud software apps or services, but a broad range of cloud-based tools (think Amazon Web Services, Google Apps, Zoho, DropBox, LinkedIn) if you are paying a fee.

See Pennsylvania Joins Other States in Taxing the Cloud from Crowe Horwath LLP.


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