Taxation of Software Downloads: Infrastructure and Platform as a Service

Sep 27, 2016
By: Craig A. Cookle

Too often the sales and use tax considerations of licensing software are overlooked when entering into the licensing agreement, only to find out years down the road that the transaction is under scrutiny in a state sales and use tax audit. In December 2014, we brought you the article, Sales Tax and Technology Solutions: Accepting the “Mission Impossible.” The article focused on 10 tips to consider up front that would help you navigate the complex sales tax world of technology solutions.

The previous blog post focused on the taxability of software as a service. This post will finish our discussion with infrastructure as a service and platform as a service.

Infrastructure as a Service

Infrastructure as a Service (IaaS) is a form of cloud computing that provides virtualized computing resources over the Internet. Typically, the service provider owns, maintains, operates, and houses equipment (i.e., servers, network components, etc.) that is offered to customers on demand. The customer uses the Internet to access the equipment. The key characteristic is that the service provider has control over and provides the maintenance/upkeep of the equipment at all times. In certain situations, the purchaser of the service may have physical access to and control over the equipment.


The taxability of these services is not black and white, and little official guidance has been provided by the states. In Wisconsin, charges for storage of data on someone else’s server that the customer doesn’t have control over or physical access to are not subject to sales or use tax. However, if the customer has control over and physical access to the equipment, the charges may be subject to sales and use tax as a lease or rental (in those states in which tax rental streams).


Review the contract carefully to ensure it addresses who controls the equipment, who has access, and who maintains it, since these will aid in determining whether the arrangement is subject to sales or use tax.

Platform as a Service

In a Platform as a Service (PaaS) situation, a cloud provider delivers hardware and software tools (usually those needed for application development) to its users as a service. PaaS is very similar to SaaS except that rather than being software delivered over the Web, PaaS is a computing platform that developers can use to create applications and games using tools, services, and computing power supplied by the cloud service provider. The customer does not manage or control the underlying cloud infrastructure, including the network, servers, operating systems, and storage, but has control over the deployed applications and possibly the configuration settings for the application-hosting environment. The PaaS model contains elements of both IaaS and SaaS.

The taxability of PaaS is less clear than for IaaS. There has been very little guidance issued by the states as they wrestle with the taxability of PaaS. The states that have provided guidance in this area (Missouri, New Jersey, and Wyoming) have stated that PaaS would not be taxable as long as the customer does not receive any tangible personal property or have the right to use specifically identified tangible personal property. 


In today’s environment, care must be exercised when reviewing software licensing arrangements to truly understand what the vendor is providing and the object of the transaction. State auditors are looking at these transactions closely. In determining the proper tax treatment of cloud services, auditors will often request and review any supporting contracts or agreements. Whether the arrangement is structured as a service agreement or a license to use software may impact the taxability of the transaction in hand. Wipfli has the state and local tax resources to help clients navigate through contracts involving software download arrangements and the potential taxability for sales and use tax purposes.




Craig A. Cookle, CPA
Partner, Tax
View Profile
Tax Think blog
Subscribe to TaxThink