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Is There Tax On The Cloud?

July 8, 2011

Cloud computing (also called "software as a service") takes place on virtual servers over the Internet.  Cloud computing has gained increasing credibility as an efficient and viable means of doing business.  Certain legal issues are implicated by cloud computing.

One of the unresolved legal issues is whether cloud services are subject to tax.  A handful of states, including Michigan, are grappling with whether tax can be levied on cloud computing transactions.  Depending on the type of tax being contemplated, factors to be considered in determining taxability include whether a license of software is granted by the agreement, the location, or nexus, of the server and whether the service or software is being delivered to individuals or businesses resident in a state.

Michigan's General Sales Tax Act and Use Tax Act include within their scope "pre-written computer software."  A group of eight Michigan state senators have recently introduced bills (Senate Bills 335 and 336) that would amend these acts to clarify that software as a service, or cloud computing, falls outside the definition of pre-written computer software and is, therefore, not subject to Michigan's 6% sales or use taxes.  The bills were passed by the Senate on June 16, 2011 and are currently pending before the Committee on Tax Policy in the Michigan House of Representatives.  The bills would operate retroactively and specify that the right to use pre-written software installed on another person's server is not a taxable transaction.  It is too early to know whether these bills will become law, however, anyone engaged in providing cloud computing services as well as consumers of those services should remain interested in what develops.  Review the committee summary of S.B. 335 and 336 here.

or more information about legislation or litigation involving technology, intellectual property protection of information technology assets or any other Information Technology law issue, contact Mary Kate Griffith at +1.313.496.8430.