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The Taxation of Cloud Computing: Proposed Guidance

Cloud computing and its various delivery methods continue to grow at an impressive rate.  A potent example of this growth is "software as a service," or SaaS, a product that allows consumers to access software remotely over the Internet for a fee.  For example, Google Docs, Google’s “software as a service” office suite, allows users to create documents, presentations, and spreadsheets via software stored remotely on Google’s servers.

Despite the rapid growth of SaaS, most state tax laws have not kept pace, resulting in a void of uncertainty regarding the taxability of SaaS.  For example, the Michigan sales and use taxes impose a 6% tax on the sale, use, or consumption of tangible personal property, including prewritten computer software (i.e., computer software delivered by any means, including electronically).  Logically, many have questioned whether SaaS, which allows users to electronically access remotely stored software, qualifies as tangible personal property (e.g., prewritten computer software), thereby triggering potential sales and use tax liability.

Since the issue is relatively new, only a few states have directly addressed the taxation SaaS for purposes of sales and use taxes.  However, two bills recently proposed in the Michigan legislature would eliminate the uncertainty regarding the taxation of SaaS with respect to Michigan's sales and use taxes.  Specifically, Senate Bills 335 & 336 would amend Michigan's General Sales Tax Act and Use Tax Act to exclude from the definition of "prewritten computer software" the right to use prewritten computer software installed on another person's server.  Thus, if passed, Senate Bills 335 & 336 clarify that neither sales nor use tax would be triggered by a consumer's use of a SaaS platform.

Please stay tuned for further information regarding the taxation of cloud computing, including updates tracking the progress of Senate Bills 335 & 336.

Categories: Cloud Computing, Tax

Photo of Nicholas M. Oertel

focuses his practice in the areas of Michigan non-property tax disputes, business entity selection, corporate transactions, and information technology.

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