This blog was last updated on June 26, 2021
*Part 1 of a four part blog series addressing the issues associated with sales tax and cloud computing.
What Is The Cloud?
Unless you have been hiding underground for the past few years it is hard to imagine you haven’t heard of the cloud. Yes, the cloud, the ever present all-encompassing term for all that data flying over our heads all of the time around the globe, beamed directly from computers to smartphones to tablets and back. If you ask 10 people what the cloud is, you would likely get 10 different responses with varying degrees of correctness as most people have no need to really understand the technology they are using. As tax professionals, although it would be nice to view the world through such rose colored glasses, we must examine the mundane and analyze the nature of such things in order to gain a full understanding. Once we have a full understanding, we can apply proper methodology, logic, and legal analysis in order to end up with the proper taxability result. This is my attempt to answer the first and possibly most important question, “what is the cloud?” If you have ever accessed e-mail through the internet you have likely used a cloud service. In the most basic sense, cloud computing allows people to access and store information on another person’s/businesses’ hardware over the internet. In other words, if you store information, access games, programs, applications, or services via the internet (rather than having such things stored directly on your computer, tablet, or smartphone) you are engaging in cloud computing. Some would consider the cloud as simply a metaphor for the internet. Well, that wasn’t too painful. If only it were that easy. This basic understanding is only the foundation upon which an entire industry has grown with new businesses creating new iterations of the cloud computing model.
Cloud Computing in a Business
When discussing the cloud, things can be as simple as accessing a website to retrieve e-mail on your home computer, however, there is an entirely different structure when dealing with the cloud as it relates to business. As an introduction to cloud computing in a business environment, I will introduce you to some key terms often associated with cloud based transactions. There are three main cloud computing schemes (there may be other minor schemes but for the purposes of this blog post those are of less concern), each scheme has its own commonly used abbreviation.
Software as a Service (SaaS)
Of the three main cloud computing schemes this is the one most people are thinking of as it is the most common. Software as a Service is a scheme which provides software licensing and delivery on a subscription basis. Software and applications that are accessible in a SaaS scheme can range from general programs, such as those used in word processing and email, all the way to complex software solutions including enterprise resource planning (ERP), invoicing, human resource management (HRM) and content management (CM) systems. Other names for SaaS include: service(s) as a software substitute (SaaSS), hosted managed, or on-demand software
Platform as a Service (PaaS)
PaaS provides a space for the operation of custom applications designed by the consumer. Under the PaaS scheme the consumer produces custom applications or services using tools provided by the vendor. The consumer also controls software deployment and configuration settings. The provider provides the networks, servers, storage, and other services that are required to host the consumer’s application. The client typically pays a subscription cost.
Infrastructure as a Service (IaaS)
Out of the three cloud computing models IaaS is the most basic. IaaS offers consumers the ability to outsource equipment including storage, hardware, servers and networking components (in other words significantly reduce the need for on premises hardware). The IaaS vendor would own the equipment and is responsible for housing, running and maintaining it. The client typically pays a subscription cost. Infrastructure as a Service is sometimes referred to as Hardware as a Service (HaaS). The services discussed above are often centrally hosted on servers controlled by independent software vendors (ISVs) or application service providers (ASPs). These vendors and providers are explained further as follows: Independent software vendors (ISVs) A company which is in the business of making and selling software products which run on one or more computer hardware or operating system platforms. As a SaaS vendor such businesses provide their software to consumers over the internet hosted on their servers. Application service providers (ASPs) ASP’s are a business which provides an internet hosting computer-based services to consumers on internal servers. ASP business models include:
- Functional ASP delivers a single application
- Vertical market ASP offers solution packages based on customer types
- Enterprise ASP offers broad spectrum solutions
- Local ASP for small business needs
To Be Continued…
In Part 2 of this blog series we will discuss why you should care about cloud computing and the general sales tax implications related to the cloud Then in Part 3 we will discuss sourcing issues and rules for cloud based transactions. Finally, we will wrap things up in Part 4 an in-depth review of state tax schemes being applied to cloud based transactions, specifically focusing on key states such as New York and Illinois.
