Pennsylvania (PA) imposes a sales and use (S&U) tax on the retail sale of tangible personal property and certain services. For S&U tax purposes, the sale, including a license to use, canned computer software is subject to tax, even if delivered electronically.
“Cloud computing” and “digital content” refer to a variety of software products and services that use a server infrastructure and are accessed and used by end users using computer devices. Those end users could be customers or employees. For example, an IT company Taxpayer installs software on servers that can be accessed by its customers. In order to access the software, the customers either pay a subscription fee to the IT company or pay the IT company on a per-use basis. A company could also purchase and install software on servers that can be accessed by its employees. The employees can access their office computers and can perform work-related tasks from remote locations, within and outside of PA. The employer company pays for the software and employees can access the software through the cloud free of charge. In both cases, the employees and customers may collectively be referred to as “end users” of the licenses to use the software.
Is cloud computing subject to PA’s S&U tax?
PA has ruled that charges for the use of canned computer software that is hosted on a server and accessed electronically by a taxpayer’s customers and employees (also known as cloud computing or software as a service) are subject to PA S&U tax if the user is located in PA. Because computer software is tangible personal property, a charge for electronically accessing software is taxable. In accessing the 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. The taxpayer is required to collect tax from a customer when the user is located in PA. Software used by employees is subject to use tax if the employees are in PA. If the billing address for the software is in PA, the presumption is that all users are located in PA, unless the purchaser presents an exemption certificate that states the percentage of users located outside the state. Charges for remote software access are not subject to tax if the user is located outside PA, even if the server that hosts the software is located in the state. The taxpayer may claim a resale exemption on the purchase of software to be located in PA if tax will be collected on the use of the software in PA.
While PA has ruled that charges for remote access are not subject to tax if the user is located outside of PA, a user could possibly find itself subject to another state’s S&U tax.
Source: Pennsylvania Department of Revenue, PA—Legal Letter Ruling No. SUT-12-001, (May 31, 2012)
