By Phil London
One of my guiding principles for giving clients strategic tax advice is don’t make a move simply to minimize the tax impact without making sure that your decision makes sense from all other business perspectives. For example, an opinion issued by the New York State Department of Taxation and Finance has businesses considering the tax ramifications of moving operational software to the cloud.
The cloud includes servers, programs and computing services that work off your own computer hard drives and servers. Take Gmail, for example. You can access an email account located on the servers of Google instead of your own hard drive.
Businesses can run specific software programs or their entire operating systems in the cloud environment. But should they? The New York sales tax ruling may influence your decision if you operate your business in the state.
IaaS vs. SaaS
What is the difference between IaaS and other cloud options? In other services such as Software as a Service (SaaS), the user leases the use of a particular software program from a cloud-based provider. According to the New York tax commissioner’s office, SaaS customers are paying for a product — the software — and that product is a physical “thing” that is taxable.
In contrast, the Infrastructure as a Service (IaaS) form of cloud computing involves renting time on a cloud-based provider’s server. Therefore, rather than a tangible product being exchanged, it’s a service that is being sold — and it is therefore not taxable by the state.
This ruling might dissuade you from investing thousands of dollars on servers and other infrastructure that must be housed on-premises, secured against hacking threat, regularly maintained, and periodically replaced or upgraded. But in many cases, the tax issue won’t be much more than a tiebreaker.
Phil London CPA, MBA, is a partner in the Tax Services Group at Wiss & Company LLP. He can be reached at firstname.lastname@example.org or (212) 594-8155.
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