Pennsylvania Taxing the Clouds

A recent letter ruling issued by the Pennsylvania Department of Revenue discusses the applicability of sales and use taxes to cloud computing. Generally, cloud computing consists of users accessing software that is stored remotely on servers as opposed to the user’s own computing device.

In 2010, Pennsylvania clarified its position that canned software is considered tangible personal property and is taxable no matter the means of delivery. In this current letter ruling, the Department determines that a charge for accessing canned software is taxable when the person accessing the software is located in Pennsylvania.

Software accessed by users outside Pennsylvania is not taxable even when the software is housed on a server in the Commonwealth. Conversely, when canned software housed on a server outside Pennsylvania is accessed by a user in this state, it is subject to tax.

If your business sells or uses taxable canned software in Pennsylvania, you are required to collect sales tax or accrue use tax when the end-user is located in Pennsylvania. Businesses that charge for access to taxable canned software in the cloud may purchase the software under a resale exemption and collect sales tax based on the use of the software in Pennsylvania. When a business purchases taxable canned software that will be accessed from a cloud server and the delivery address of the purchase is in Pennsylvania, the state presumes all users are in Pennsylvania. This presumption can be rebutted by determining the respective in-state and out-of-state user percentages and properly documenting the percentages through the use of Pennsylvania’s exemption certificate. 

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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