In Matter of SunGard Securities Finance LLC (Division of Tax Appeals, February 6, 2014) (“SunGard”), a New York Administrative Law Judge (“ALJ”) held that the provision of certain computer data processing services accessed via the “cloud” was not subject to New York sales tax as the taxable sale of canned software, but rather was a nontaxable information service. Although this is an ALJ decision (which may not be cited as precedent), it is nonetheless important because it challenges the longstanding view of the Tax Department that remote access to software is the taxable sale of tangible personal property, even in situations where the requisite possession and control of the software may be lacking.
SunGard provides broker-dealers and other financial institutions with a Smart Loan service to facilitate securities lending and borrowing transactions. Pursuant to an Application Service Provider Agreement, customers enter data into a system within certain timeframes. Through the use of proprietary data processing software, SunGard provides data processing services and fulfills back office functions for its customers, including analyzing, processing and maintaining ancillary accounting ledgers for the customer’s securities lending and borrowing transactions. SunGard makes such information available to its customer’s employees in various formats, during certain business hours. SunGard’s customers cannot access or modify the Smart Loan proprietary data processing software.
In order to enable its customers to use the service, SunGard provides customers with ancillary software to establish a secure connection with its customer for purposes of transferring data. No charge is made for this software, and the software cannot function independently of the service.
New York Sales Tax Law
In New York, sales tax is imposed on the sale of tangible personal property and certain enumerated services. New York treats prewritten (often referred to as “canned”) software as tangible personal property. A license to use canned software is considered a sale where actual or constructive possession of the software has been transferred, or the customer has the right to use, control or direct the use of the software. Under this statutory framework, the Department argued that SunGard had licensed prewritten software to its customers for use on their own computers.
Conclusion of the ALJ
Contrary to the Department’s contention, the ALJ held that Smart Loan customers did not purchase canned software. Instead, they purchased an information service where SunGard obtained customers’ transactional data, added to that data by organizing it in new ways and presented the data in custom reports via its own proprietary software.
The ALJ’s conclusion was based on the fact that SunGard did not transfer, sell or license its system to its customers in tangible or electronic form, and its customers did not have access to the proprietary software. For example, SunGard’s customers had no right to use, modify, or alter the software used in the data processing service, but rather the software was used only by SunGard personnel in performing the data processing service. Further, customers could only access the information created by the software during certain business hours. The ALJ also determined that the ancillary software used to support the data link was integrally related to the service provided and could not function separately from the service.
Under these facts, the ALJ determined that SunGard sold information services rather than canned software. Since the information transmitted was personal or individual in nature and could not be substantially incorporated in reports furnished to other persons, the services were not taxable.
Moving Forward in New York
The Department frequently takes the position that services (commonly referred to as the Software as a Service, or SaaS model) sold by Application Service Providers are taxable as sales or licenses to use canned computer software. However, if the purchaser does not take possession (actual or constructive) or control of the software, which necessarily includes having the ability to use, modify or alter the software at any time, and does not have the ability to input their own data into the software, the transaction may be more properly characterized as a service, which may or may not be taxable depending on the nature of the service.
The imposition of sales tax on “cloud computing,” a term of art generally used to refer to three types of services - software as a service (SaaS), infrastructure as a service (IaaS) or platform as a service (PaaS) - continues to be a hot topic in many states. The service most commonly addressed by states is SaaS, because it is comparable to the electronic transfer of canned software. As a result of trying to interpret and apply outdated laws to new technology, states vary widely in their application of sales tax to SaaS. In states where sales of canned software, including software delivered electronically, are taxable, charges for SaaS are generally also taxable. Other states view SaaS as the sale of a taxable computer and data processing service or an information service.
GMG Observation: It is important to understand the nature of what is being purchased to determine whether the transaction is taxable. If the transaction is more akin to accessing and using software applications similar to those that can be purchased “in a box,” it may be proper to treat the transaction as the sale of tangible personal property. However, as SunGard illustrates, where the customer does not have the requisite possession and control of the software, the transaction may in actuality be the purchase of a service, which may not be taxable in a particular state.