The Virginia Department of Taxation has recently issued Ruling of the Commissioner No. 13-182 (10/18/2013) holding that an out-of-state application service provider (“ASP”) providing cloud based and hosted phone and other services that support voice processing and routing, video processing, storage and transmission, voice message, presence applications for instant messaging and audio conferencing, web conferencing and wireless/mobile communications does not need to collect and remit sales taxes on sales to Virginia customers because no tangible personal property is transferred to the customer. The bad news? These same services may be subject to the communications sales and use tax if the taxpayer has nexus with Virginia.
The ASP’s customers are charged a monthly fee that covers charges for accessing the ASP’s hardware, software and services and for the provision of storage, rack space, power and cooling, monitoring and management and most modifications and upgrades needed to provide the ASP’s services. The customer does not download or otherwise possess the software that is hosted by the ASP. Nor does the ASP provide telecommunication, Internet or network connections necessary for the customer to utilize its services.
Since 2007, Virginia has imposed a communications sales and use tax on communications services, which are defined under Va. Code Ann. §58.1-647 as follows:
“Communications services” means the electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals, including cable services, to a point or between or among points, by or through any electronic, radio, satellite, cable, optical, microwave, or other medium or method now in existence or hereafter devised, regardless of the protocol used for the transmission or conveyance. The term includes, but is not limited to, (i) the connection, movement, change, or termination of communications services; (ii) detailed billing of communications services; (iii) sale of directory listings in connection with a communications service; (iv) central office and custom calling features; (v) voice mail and other messaging services; and (vi) directory assistance.
In this case, it is unclear from the facts stated, the extent to which the ASP provides “the electronic transmission, conveyance, or routing of voice, data, audio, video or any other information or signals.” As noted in the ruling the ASP does not provide “telecommunication, Internet or network connections that are necessary for its customer to utilize its services.” Nevertheless, the Department stated that “it appears that the Taxpayer provides taxable communications services to customers in Virginia when it electronically routes voice, data, or audio signals and provides voicemail services.”
This is the first instance in Virginia where we have seen the Department rule that an ASP may be subject to communications sales and use tax. Note, however, that the ASP services described in this ruling appear to be VOIP type services, a service model expressly intended to be captured by Virginia’s communications sales and use tax - emphasizing the fact that one should not look to the label of the agreement when making taxability decisions, but should look closely to the underlying services being performed. While we commonly see the term ASP used to refer to remotely accessed software, this term can be broadly used by vendors to cover a variety of internet based services.
However, Virginia’s opinion that its communications sales and use tax applies to this ASP is noteworthy. This ruling further underlines the continued efforts of states to somehow tax cloud based services under their existing statutory schemes. We have more commonly seen states attempting to tax the services of an ASP as either the sale of prewritten computer software (e.g., Indiana, Massachusetts, New York, Utah, etc.); or (2) as a as data processing services (e.g., Texas). However, South Carolina has long taken the position that ASPs are taxable as a telecommunications service – regardless of whether the services are VOIP related.
Virginia’s move to tax the services provided by this Taxpayer as a communications service could undoubtedly cause other states with similar provisions to examine whether ASPs are potentially taxable in their own states as a telecommunications or communications service – an inherently important issue given the significant rate differential in some states for communications services.
As always – your questions and comments are not only welcomed – but greatly appreciated.
Other recent “Cloud, Software & Digital Tax” posts by Carolynn Iafrate Kranz:
- Pennsylvania Tax on Software Support Services: Ruling Re-issued
- Illinois Finally Rules on SaaS
- Tennessee’s Situsing of Accessed Software Runs Afoul
- Chicago Taxes the Cloud
- Tennessee Enacts Legislation Taxing Remotely Accessed Software