In the Cloud: Is Cloud Computing Subject to Sales Tax in California?

Over the past decade, cloud computing has become not just a trend but a necessity for most businesses.  Like most areas of sales tax, the technology moves at light speeds faster than the law.  Antiquated and outdated California sales tax laws have not changed with the times and old concepts are used to try and apply to new technologies not even imagined when the laws were adopted.  Trying to fit a round begins a square hole has led to confusing and contradictory outcomes in many states and often within a state when dealing with the taxability of software as a service (“SaaS”) or cloud computing.

What is Cloud Computing

Generically, cloud computing is a software delivery system in which customers access the software remotely by using a third-party provider.  For business, it allows many users to access software without dealing with the associated IT headaches that can bog down a company.  Even the most traditional and outdated businesses, like sales tax lawyers’ offices, use cloud computing and many organizations use them in multiple states.

The primary issue from a sales tax perspective is identifying what is being purchased by the customer.  Are they using the software?  If so, should traditional software rule apply? Is the SaaS purchased by the consumer a service?  Is that service taxable? There tend to be no clear-cut boundaries to distinguish traditional software, SaaS, and other similar digital products.

In California, the prevailing view is that SaaS or cloud computing is not subject to California sales tax.  However, if you provide SaaS or cloud computing and sell it into other states, an analysis might be in order. Further, if you have offices outside of California and use cloud computing, it probably makes sense to investigate before you get that dreaded audit notice from another state.

At Sales Tax Helper we help those in need of sales tax audits, protests, and administrative litigation. More importantly, we provide services equivalent to tax attorneys at the price of a sales tax consultant. Simply put, this is what we do, and we will work hard to reach a reasonable resolution for your business’s sales tax liabilities. We welcome the opportunity to handle your sales tax issues and be part of your team!

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Our Sales Tax Consulting Services can help with Sales Tax Audits for Defense, Litigation, Process, and Protest Assessment.

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