I recently wrote a blog post on the new Vermont law on sales tax on cloud computing services, in which the state placed a moratorium on taxation of software as a service (“SaaS”). Pennsylvania, however, has decided to take a different approach to cloud computing. In Legal Letter Ruling No. SUT-12-001 (May 31, 2012), the Pennsylvania Department of Revenue announced a change in the existing law in Pennsylvania. In particular, the Department’s new approach is that SaaS is taxable in Pennsylvania to the extent that the users of the services are located in Pennsylvania. The Department took the position that the charge for electronically accessing taxable software is taxable because computer software is tangible personal property, and the user “is exercising a license to use the software” within the meaning of 72 P.S. § 7201(o)(1). That section of the statute provides that the exercise or right or power incidental to the ownership of tangible personal property constitutes a taxable “use.”
But this recent ruling, and basis therefor, is inconsistent with the prior ruling of the Pennsylvania Department of Revenue, Legal Letter Ruling No. SUT-10-005, in which the Department held that access to software solely through the internet from a data center located outside of Pennsylvania is not taxable because there is not a taxable transfer in Pennsylvania. Nowhere does the Department of Revenue in its 2012 ruling explain the basis for its ruling that a taxable transfer of the tangible personal property has occurred in Pennsylvania, other than the reference to “recent case law and technological advances.” In the case the Department identifies, Dechart, LLP v. Commonwealth, 998 A.2d 575 (Pa. 2010), the court found that electronically transmitted software downloaded to a computer in Pennsylvania constitutes the sale of tangible personal property in Pennsylvania.
However, there is no tangible personal property that is present in Pennsylvania for software that is accessed remotely from a data center located outside of Pennsylvania. Thus, as I wrote in my article on cloud computing, Let the Sunshine In: The Age of Cloud Computing, State Tax Notes November 28, 2011, and as other states (such as Kansas, Utah and Arizona) have ruled, SaaS should not be taxable in Pennsylvania because the tangible personal property is not transferred in Pennsylvania.
The 2012 ruling took yet another twist. The Department stated that if the customer is billed in Pennsylvania, all of the service will be deemed to be subject to the Pennsylvania sales tax, unless the customer is able to produce an exemption certificate in accordance with Form REV-1220, a form unique to Pennsylvania, that shows the percentage of users outside of Pennsylvania. The form (rev-1220, available here), however, says nothing about a statement of use outside of Pennsylvania. I assume that the “other” box should be filled in together with a statement of the number of non-Pennsylvania users.
This Pennsylvania ruling, therefore, presents another issue for cloud computing service providers who provide their services to customers located throughout the United States. Do they use the Pennsylvania-specific form (adapted as described above) when they have a Pennsylvania customer and a Multistate Points of Use Form, as found in Ohio (available as form STEC MPU, here), for all other customers? Or does the provider use both forms for each customer, regardless of location?
In short, it is prudent for any users billed in Pennsylvania for SaaS to issue an exemption certificate based upon the Pennsylvania Form REV-1220. A multistate cloud computing service provider, at a minimum, should use a form along the lines of the Ohio form and consider using the Pennsylvania form as well.
