Introduction to the cloud

September 13, 2017|Sarah Evans

Determine sales tax treatment for cloud computing services in Wisconsin. Then realize your tax liabilities may be different in other states.

Just a few short years ago, cloud computing seemed like a hazy concept, but the business world has now adopted the cloud as the norm. You may not have given much thought to how cloud computing services actually work, but you’re happy they do. Have you also thought about how they’re taxed?

For those unsure what the concepts and acronyms mean, consider this your primer. If it were a college course, it would be “Intro to Cloud Computing and Wisconsin Sales Tax Treatment 101.”

What is the cloud?

Data and software computing platforms can be accessed from a cloud service provider—rather than a physical, on-site server. These digital products and services are often accessed via the internet. Sales tax treatment for these services are not always consistent across state lines and it continues to evolve.

What is software as a service?

Application service provider (ASP) software, also known as software as a service (SaaS), is a transaction in which a purchaser pays to use software over the internet under a limited license of use.

What differentiates ASP software from traditional software sales or licenses is that the purchaser does not typically download or install any software on their computer or device. Therefore, there is no "real" transfer of tangible personal property or "download" of software. Instead, the software is merely accessed and used over the internet by the purchaser. Under this type of arrangement, the ASP software provider hosts the software on its equipment, which is often located outside the state of the purchaser or user, and permits the purchaser to use the software under a limited license of use.

Wisconsin does not tax SaaS, regardless if the server is located inside Wisconsin or out of state. In addition, associated installation and setup fees, phone support services (whether mandatory or optional) are also treated as nontaxable services.

What about the other states?

Fifteen states tax SaaS at the full sales tax rate. Connecticut taxes SaaS at a 1% rate and Vermont and Michigan have reversed their position and now treat SaaS as a nontaxable service. The state of Illinois does not tax SaaS, but the city of Chicago has a personal property lease transaction tax that applies.

Hardware can also be in the cloud

Infrastructure as a Service (IaaS) and Desktop as a Service (DaaS) are transactions in which a purchaser pays to access computing infrastructure, including servers, storage, processing capacity, networks and operating systems, as a fully outsourced, on-demand service. If desired, the customer can deploy and run its own software (developed internally or purchased from a third party) on the computing infrastructure.

The customer does not manage or control the underlying computing infrastructure, but instead exercises control over the operating systems, storage and deployed applications. IaaS may be accessed either over the internet, on a self-service basis or over a private network. In addition, depending on the nature of the IaaS offering, the underlying computing infrastructure may be shared among the service provider's customers, or may be dedicated for the use of a particular customer.

Wisconsin does not tax IaaS, regardless if the equipment or server is located inside Wisconsin or out of state. CPU and RAM usage charges, server storage and backup storage usage charges are all nontaxable transactions or charges. If you operate in multiple states, it is important to consider the tax treatment of each state individually. Some will treat IaaS as a nontaxable service, some will treat it as a taxable hardware lease or taxable service, and some do not provide specific guidance.

Software developers often use cloud based development platforms

Platform as a Service (PaaS) is a transaction in which a purchaser pays to use development software over the internet (along with the underlying computing infrastructure on which the development software runs). Development software is software used to create software programs. Software created using PaaS may be moved or used freely on any system.

Wisconsin imposes tax on sales of tangible personal property and specified services, but not PaaS because there are no applicable taxable services.

Additionally, the Wisconsin Department of Revenue has taken the position that this is not a taxable sale or rental of software unless the buyer:

  1. Controls or operates the vendor's server, and
  2. Has physical access to the server.

Please note that some states treat PaaS as a service, some treat PaaS as electronically delivered software, and some states provide no guidance at all.

If you have specific questions, please reach out to Sarah Evans, State and Local Tax manager, at or any member of the State and Local Tax Team at 800-236-2246.

Sarah Evans, CPA, has more than 25 years of state and local tax experience. Her experience includes coordination of sales tax audits and reverse audits as well as research, planning and compliance related to sales and use, property, income and franchise taxes.