The interesting part is that if your business provides or uses cloud-based computing, you may already have a liability that you may not be aware of. Not knowing what you don’t know is a very dangerous situation and can lead to unrecorded liabilities and related penalties and interest for businesses.
When a taxing authority decides to audit your business, they have the benefit of 20/20 hindsight and are not shy about being liberal as they interpret the law and calculate the tax bill.
You see, when it comes to collecting and remitting sales and use taxes to the state, it is the seller who is responsible – literally. If your company sells something that is taxable and fails to collect and remit the tax, the state will assess the tax, penalty and interest to you. You can claim that it is the end user’s responsibility to pay the tax but you will have to collect from them!
The ability of a state to assess sales and use taxes is dependent on nexus: where a business has a physical presence. But when it comes to the cloud ― where services are sold to customers who may access them anywhere from servers located who-knows-where by companies that may be headquartered anyplace ― determining nexus, and the liabilities that go with it, is anything but straightforward.
The state of New York ruled that nexus is determined by where an application is used, not where it’s hosted. This has created something of an “economic nexus” that changes everything for the provider/seller and the customer. “Out-of-state businesses establish nexus “when making sales through an agreement with a person located in that state and the in-state person refers customers to the out-of-state business through a website link” according to a senior tax manager at a national accounting firm.
This is a complex issue that is still evolving but if you use any cloud computing services such as Salesforce.com, Netsuite, QuickBooks on-line, or a third party hosting services, you could be incurring a liability for sales & use tax. If your business provides a cloud computing solution, you could be liable to charge, collect and remit sales & use taxes.
As the saying goes, “Forewarned is Forearmed” so now that you know what you don’t know, you can at least ask the right questions and make sure that you don’t get surprised by a large tax bill sometime in the future. Good Luck!