Never let taxes be the tail that wags the dog.

For years, that’s been one of my guiding principles when it comes to giving clients strategic tax advice. Don’t make a move simply to minimize the tax impact without first 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

The cloud encompasses the servers and programs and computing services that are at an environment off your own computer hard drives and servers. Take Gmail, for example. You’re able to access a personal or business email account located not on your hard drive but on the servers of Google. Even though you don’t physically own the account, you can access it from any Internet-enabled device to receive and send emails 24/7. Google technicians make sure that their servers are secure, well maintained and always available.

Businesses can run specific software programs or virtually 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.

In an advisory opinion from the New York State Department of Taxation and Finance, the entity determined that the petitioner’s Infrastructure as a Service (IaaS) cloud computing offering was not subject to sales tax, reasoning that the IaaS model is actually a service and, as with most services, would not be taxed by the state.

Compare that to the alternative of having servers to run your company’s software physically at your location. In that instance, without question, you would be compelled to pay sales tax on all of the hardware you purchase or lease.

IaaS vs. SaaS

The IaaS form of cloud computing involves renting time on a cloud server. This is in contrast to the Software as a Service (SaaS) form in which the user leases the use of a particular software program from a cloud-based provider. According to the New York tax commissioner’s office, the difference is that SaaS customers are paying for a product — the software — and that product is a physical “thing” that is taxable, while the IaaS arrangement results in the customer leasing time on the cloud-based provider’s servers. 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.

So what does this ruling mean as you crunch the numbers to determine whether to take your business computing into the cloud? It 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 plondon@wiss.visioncreativegroup.com or  (212) 594-8155.