Is a cloud-computing (infrastructure-as-a-service) product that sells scalable computing power subject to NY sales tax?
Plain-English summary
The Petitioner sells a cloud-computing product -- Internet infrastructure ("instances" of CPU, memory, and storage) that customers rent by the hour to run their own applications (data analysis, e-commerce, gaming, websites). To use an instance, the customer gets an operating system (open-source, or a third-party OS Petitioner licenses) plus access to APIs and an optional management console. Petitioner charges only for the computing resources consumed, not separately for software.
The Office of Counsel concluded the product is NOT taxable:
- Selling computing power is not an enumerated service. None of the taxable services in section 1105 covers providing raw computing capacity, so the receipts aren't taxable.
- The bundled software is only incidental. Granting the right to use a third-party OS is technically a transfer of prewritten software (Reg. 526.7(e)(4)), and APIs might be software too -- but the customer isn't paying for that software. The customer subscribes to run its own application using Petitioner's computing power; the OS and APIs are an incidental part of that service.
- Contrast with software-first products. This differs from products where the software is what the customer wants (e.g., TSB-A-10(28)S -- prewritten expense-tracking software accessed over the Internet was taxable). Petitioner's advertising emphasized the scalability, reliability, and security of its computing power, confirming the product's primary function.
What this means for you
Infrastructure-as-a-service (IaaS)
If you sell raw, scalable computing capacity and customers run their own software on it, the charge is generally not taxable in New York -- computing power isn't an enumerated service. The OS and tooling you must hand over to make it usable don't flip that result if they're incidental.
The primary-function test for anything software-adjacent
The dividing line is what the customer is really buying. Bundled prewritten software the customer didn't come for (an OS, APIs, a console) stays incidental; a product whose point is to use the software (SaaS the customer logs in to use) is taxable prewritten software.
Keep the "incidental" story honest
Petitioner didn't separately charge for software, and its marketing matched its position. If you bill software separately or sell it as the headline feature, expect a different answer.
Common questions
Q: Is cloud computing / IaaS taxable in New York?
A: Not when the product is the sale of computing power that customers use to run their own applications -- that's not an enumerated taxable service.
Q: We have to give customers an operating system and APIs -- does that make it taxable software?
A: No, if those are incidental to the computing service. The transfer of the OS/APIs is taxable only when the software is the primary thing the customer is paying for.
Q: What makes a cloud product taxable instead?
A: When its primary function is letting the customer use the vendor's prewritten software (SaaS), the charge is a taxable license to use prewritten software under section 1105(a).
Citations and references
- Tax Law section 1105(a) (retail sale of tangible personal property, including prewritten software)
- Tax Law section 1105 (enumerated taxable services)
- Tax Law section 1101(b)(6) (prewritten computer software)
- 20 NYCRR section 526.7 (transfer of the right to use prewritten software)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2015.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a15_2s.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-15(2)S
Sales Tax
April 14, 2015
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. S120425A
The De partment of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTED. Petitioner asks whether its Cloud Computing product is subject to New
York sales and use tax. We conclude that Petitioner’s sales of the product are not subject to sales
and use tax because the product constitutes a non-taxable service.
Facts
1. Overview
Petitioner’s Cloud Computing product offers Internet infrastructure for businesses, which
can use it for a variety of purposes, including to run applications for internal purposes (e.g., a
“big data” analysis), or to host a commercial website (e.g., an on-line store). Petitioner’s Cloud
Computing product provides scalable (i.e., readily expandable) computing capacity for
customers to execute applications over the Internet. Petitioner’s Cloud Computing product is a
model of computing in which dynamically scalable computing resources are provided as a
service over the Internet. Through Petitioner’s Cloud Computing product, customers can run any
application that they could run on their own computers, including, but not limited to, gaming
software or e-commerce software. In presenting Petitioner’s Cloud Computing product,
Petitioner’s website promotes its scalability, the ease with which additional computing capacity
can be purchased and brought on-line, the service’s reliability or “uptime,” and its security.
As part of Petitioner’s product, customers create a virtual server to run specific services
and applications by selecting a configuration of memory, CPU, and storage that is optimal for
their demands. Petitioner provides this product in units called instances, which constitute
hardware and software. Customers access the instances they bought through means of an
account. Accounts are assigned encryption keys that customers use to access their instances.
Customers retain all intellectual property rights to all data and content that they upload to use in
relation to their instances.
“Virtual” in the above paragraph refers to the fact that Petitioner does not identify a
specific server for each customer. Rather, when a customer requests a certain amount of
computing power, Petitioner decides, through its personnel and systems, what machine or
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machines will provide the computing power. As circumstances warrant, Petitioner may
designate a different machine or machines to provide the customer’s computing power. To
supply the necessary computing power, Petitioner generally uses hardware that is known as
“multi-tenancy,” meaning that many virtual servers can be created from one piece of hardware.
Therefore, computing power sold to many different customers could emanate from just one piece
of equipment. Occasionally, a customer will request that the customer’s computing power come
from equipment that is not providing virtual servers to other customers, which is known as a
“dedicated instance.” Customers have no physical access to the servers providing their
computing power and Petitioner does not designate a specific server or other piece of hardware
for use by any customer. Customers have the ability to select specific data centers, but not
specific equipment within the data center.
2. How Petitioner’s Cloud Computing Product Functions
Petitioner makes available to customers a variety of software, data, and other content as
necessary for use of Petitioner’s Cloud Computing product at no extra charge.
Customers must use some operating system software and/or applications to use the Cloud
Computing product. Thus, in purchasing an instance from Petitioner, the customer must use
either Petitioner’s open-source operating system software (“Open Source Instance”), or a
designated third-party operating system software that Petitioner has licensed (“Third Party
Instance”). Open Source Instances consist of software that is free to access by anyone, including
Petitioner, via the Internet, which Petitioner has optimized for use with its Cloud Computing
product. In an Open Source Instance, the software will be accessed for free by Petitioner and
offered to customers for no charge. With respect to Third Party Instances, Petitioner will license
software from a third-party for use in providing its Cloud Computing product to customers.
Petitioner claims that, because of prohibitions in its licensing agreements with third party
software providers, Petitioner does not sublicense the software to its customers or permit its
customers to download any software. Petitioner does not charge customers separately for the
operating system software provided in connection with Third Party Instances. The number of
customers that purchase instances running open source operating systems is far greater (by
several multiples) than those that purchase instances running a Windows or other proprietary
operating system.
Once a customer has requested an instance and specified an operating system (e.g., a
“small” or “large” instance running a Linux or Windows operating system) and Petitioner has
made it available, the customer can connect with the instance’s operating system. Customers
can do any of the same administrative functions with the instance’s operating system that they
could do with an operating system they have running on a physical server located on their own
premises, including uploading and installing of a customer’s own software. The operating
system is the minimum software needed for a customer to be able to run an application using the
computing power provided by Petitioner’s service. Customers can also use the operating system
to search for files they have saved on the instance, create directories, or download files.
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Customers may also download free application tools or kits that are used to access and
configure their Cloud Computing instance. Petitioner provides users with free software
development kits (SDKs). The kits include a library, code samples, and documentation for
developers, application programming interfaces (API), a web interface, and a repository for free
public data sets. The SDKs give customers the information they need to build programs that will
run seamlessly on Petitioner 's infrastructure services. An API is a set of commands, functions,
and protocols that a programmer can use when building software that will interact with a specific
application or operating system. APIs essentially are an instruction manual that tells
programmers how to interact with an application. The APIs that Petitioner publishes are
commands that allow any program that a customer creates, whether that program is running on a
Cloud Computing Instance or outside of Petitioner’s computing environment, to interact with
Petitioner’s data center servers. For example, Petitioner publishes APIs that allow a computer
program to request data on Cloud Computing pricing history or to request new Cloud Computing
resources (i.e., new instances) from the data center servers. These APIs are listed on Petitioner’s
website as a free directory. Anyone, customer or not, can see the directory and use the APIs.
Petitioner also makes available to users a console as part of its service. The console is an
internet browser based tool that customers use to manage the computing power they have
requested (e.g., customers can see details on the instances they have running and request more or
fewer instances through the console), and see the accumulating charges for those instances and
other services that they may have requested. To use the management console, customers log into
their account on Petitioner’s website; the web page environment they log into is the management
console. A customer can perform all of these same actions by using the free APIs in the
directory. The console is simply a web-based tool that uses a graphic user interface to represent
those API's. The use of the management console is optional. Many customers use the APIs
instead of the free console, while others build their own graphic user interface.
- Pricing
Petitioner charges customers for Cloud Computing based on hourly rates for the
computing resources they consume. Petitioner generally does not charge any fixed fees. Thus,
the more advanced the type of CPU, and the greater the amount of memory and storage required
by the customer for an instance, the greater Petitioner’s charge will be for the instance. The
amount of a charge for an instance also depends on the operating system the instance utilizes -Open Source Instance or Third Party Instance. Third Party Instances that include third party
operating system software that Petitioner has licensed for its use may be charged at a higher rate,
while Open Source Instances that include other operating system software that Petitioner
accesses for free may be charged at a lower hourly rate. Petitioner does not separately charge its
customers for use of any software or applications. Petitioner charges solely for providing
computing resources. Petitioner also charges its customers a data transfer fee for uploading or
downloading data. The data transfer fee is separately stated on the customer invoice. Petitioner
is not requesting any opinion on the sales taxability of the data transfer fee.
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Customers may use the Cloud Computing product at any time, for any length of time.
Alternatively, customers may reserve instance capacity by paying a one-time fee for an instance
and receive a discount on the hourly rate.
Analysis
The Tax Law imposes sales and use tax on the retail sale of tangible personal property,
including prewritten computer software, and the sale, except for resale, of certain enumerated
services. See Tax Law §§ 1101(b)(6); 1105(a), (b), (c).
Petitioner’s Cloud Computing product allows customers to access computing power -- a
specific array of a processor, memory, and storage -- that Petitioner refers to as computer
instances. Based on the above facts, and Petitioner’s advertising of the product, Petitioner’s
customers purchase these computer instances in order to run their own software applications.
The applications that customers run on Petitioner’s Cloud Computing product include data
analysis software, intranet software, and e-commerce software.
In purchasing an instance, a customer is provided with an operating system that is
necessary for the instance to interact with Petitioner’s server network. The operating system
represents prewritten software. The customer uses the operating system to perform certain
administrative functions, such as to download an application, delete an application, or search for
a file. By granting the right to use the third-party operating system, Petitioner is transferring the
right to use prewritten computer software within the meaning of § 526.7(e)(4) of the Sales Tax
Regulations. However, a customer does not subscribe to Petitioner’s Cloud Computing product
in order to use the operating system. Rather, it subscribes to the product in order to run an
application of its choosing using Petitioner’s computing power. This makes Petitioner’s Cloud
Computing product different from those products where the vendor’s transfer of the right to use
prewritten software to the customer is what the customer primarily wants from the vendor. E.g.,
TSB-A-10(28)S (vendor sold customers prewritten software accessible over the Internet that
allowed the customers to record their travel expenses). Petitioner’s advertising demonstrates that
the purpose of its Cloud Computing product is to provide customers with the right to use the
computing power to run an application. Petitioner’s website emphasizes the scalability of
Petitioner’s computer power, the ease of accessing it, and its reliability and security. In sum, the
transfer of the right to use the operating system software is only an incidental part of the Product,
which primarily consists of the sale of Petitioner’s computing power.
Similarly, in purchasing an instance, a customer gets the right to use APIs. Customers
can use them to interact with Petitioner’s servers, in order to perform such administrative tasks as
buying additional instances or changing the configuration of an instance, or they can incorporate
these APIs into applications to allow the applications to interact with Petitioner’s servers. Even
assuming that an API constitutes prewritten software, the transfer of the right to use these APIs is
an incidental part of Petitioner’s Cloud Computing product, the purpose of which is to allow the
customer to use Petitioner’s computing power to run an application.
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Because providing a customer with computing power is not one of the services made
taxable by the Tax Law, Petitioner need not collect sales tax on its sales of its Cloud Computing
product as described herein. See Tax Law § 1105.
DATED: April 14, 2015
NOTE:
/S/
DEBORAH R. LIEBMAN
Deputy Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.