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发帖数: 29846 | 1 As the cloud-computing market grows, revenue-starved states are looking to
grab a piece of the action by expanding the definition of nexus.
David Rosenbaum
Rackspace, a cloud hosting company headquartered in San Antonio, has been
racking up sales at a torrid pace. Net revenue for the second quarter of
2011 was $247 million, a 32% increase over the previous quarter, beating
analyst expectations and propelling the company to $1 billion in annualized
run rate revenue. The company reported 10,000 new customers in its October
earnings call, bringing its total count to 152,000. Gartner has placed
Rackspace in the upper-right “visionary leader” square of its trademarked
Magic Quadrant for hosting and infrastructure-as-a-service.
But this success doesn’t prevent Lew Moorman, Rackspace’s president, cloud
and chief strategy officer, who otherwise brims with enthusiasm for his
company and for the future of cloud computing (“It’s an irreversible trend
!”), from getting a tad cranky when the subject turns to his company’s tax
liabilities in its home state. Not only does Rackspace pay sales tax on
each server it purchases and locates in Texas, it also pays a Texas margin
tax based on every Rackspace customer hosted on a Texas server, whether or
not the customer has a physical presence in Texas.
The company officially states that it believes the margin tax to be punitive
, and Moorman says that as long as it’s applied, “We’ll never build
another database in Texas.”
Texas isn’t the only state that taxes cloud providers. New York, for
example, has treated cloud-computing transactions as a sale of tangible
property subject to New York sales tax since 2008. In general, revenue-
starved states, facing a projected 2012 budget shortfall of $102.9 billion,
are powerfully motivated to collect tax on cloud computing, a market that
Forrester Research estimates to be $41 billion this year, on its way to $241
billion by 2020. So far, however, “only a handful of states currently have
specific language providing guidance on the taxability” of cloud and
software-as-a-service (SaaS), says Joel Waterfield, a senior manager at
Grant Thornton.
The Metaphysics of Nexus
Sales and use tax boils down to nexus: where a business has a physical
presence that opens it up to tax liability within that jurisdiction. 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. The location of the software code,
according to the 2009 opinion of the New York Commissioner of Taxation and
Finance, “was deemed irrelevant. . .because the software could be used just
as effectively by the customer even though the customer never received the
code on a tangible medium or by download.” (Meaning, the customer accessed
the software through a browser, as is the case with cloud services.) The
fact that the cloud contract “provided no grant of license to use software
” was “not found controlling.” In other words, the cloud provider should
be collecting sales and use tax just as if it were mailing disks to the
customer, and the customer should be paying whether or not it receives a
perpetual license.
Waterfield notes that many states are moving toward an “economic nexus”
standard whereby 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.”
Keeping track of a cloud provider’s tax liability among multiple states can
get complicated. “If you have three servers in three states, software
could be running in any one at any time, so you’d have to consider nexus in
all three states,” notes Marc Linden, CFO of California-based Intacct, an
accounting and financial management SaaS provider that, according to Linden,
leases 14 third-party SaaS applications itself. For example, “We have
disaster recovery [a backup data center] in Pennsylvania, and that
establishes nexus in that state. A third party runs it; we never have people
going there and no one touches it, but we have a tax liability in that
state. For customers who buy our services, even though they’re buying from
us in California, they have to pay sales tax in Pennsylvania because we have
nexus there.”
But how do purchasers find out that the services they think they’re buying
in California are also taxable in Pennsylvania?
“They find out when they get the sales-tax bill,” Linden says. “Do they
like it? No. Does anyone ever argue? No. Do they have a choice? No.” Indeed
, Waterfield points out that regardless of whether a cloud provider collects
sales tax, “it is still the responsibility of the purchaser to determine
whether the tax is due, or whether the tax was administered properly by the
seller.”
This isn’t easy, so, according to Waterfield, under the Financial
Accounting Standards Board’s Accounting Standards Codification (ASC 450)
businesses are required “to accrue reserves for future losses that are
likely to occur relating to sales or use taxes.” But, he stresses, they
only have to do that if the amount of loss “can be reasonably estimated,”
which, again, is not easy in today’s environment.
Another wrinkle, says John Barrie, a partner at law firm Bryan Cave whose
practice focuses on federal and state tax controversies, is that when a
company contracts for cloud services, it’s often buying a bundle that
includes access to applications and platforms, data storage, support ―
essentially all the activities that used to be provided by a company’s
internal IT department. This exposes the purchaser to the risk that a state
’s taxing authority will calibrate the sales tax to the whole cost of the
contract if any one of the services is deemed taxable. One part of the
service bundle, say storage, may not be taxable, but access to applications
may be. But the tax will be applied to the whole contract, not just the
access portion. “From a provider’s perspective,” says Barrie, “I’m
giving you a, b, c, for one flat price, and I’m not collecting sales tax
because it’s all over the Internet. The buyer is likely not paying tax to
the state because he’s not sure what to pay until there’s an audit that
comes across a line item that says you’ve paid x; you owe y. It’s really a
risk-management issue.”
“As state budgets remain tight,” says Waterfield, “we anticipate that
more states will attempt to include these new cloud service offerings within
their tax base.”
Risk Mitigation for CFOs
If nexus arising from cloud services goes unrecognized, the consequences can
be harsh.
“Do I worry about sales-tax compliance at a CFO level?” Intacct finance
chief Linden asks rhetorically. “Absolutely. It’s a significant enough
compliance issue and potentially carries enough dollar liability that it’s
high on my agenda.
“Where CFOs go most wrong [managing SaaS] is in not thinking about where
they should be collecting sales tax early enough before facing a merger or
acquisition or an IPO,” says Linden. “Because by that time you may have
racked up millions in tax liabilities,” which would certainly affect the
deal adversely.
Jim McGeever, COO of cloud ERP provider NetSuite, has said that when his
company plans an acquisition, it may have to spend up to $1.5 million simply
to clean up sales-tax disputes. “Just the third-party consulting costs and
advisers, costs of filing all the back returns and negotiating with each
agency, it’s a very substantial process. . .expensive in terms of time,
expensive in terms of money.”
How can cloud providers and users protect themselves against sales-tax
snafus? “There are various ways,” says Linden. “Do your own due diligence
based on state regulations, especially where you know you’ve established
nexus. Hire a third-party expert where it’s ambiguous or if you have a
concern.” He recalls one Intacct customer who refused to pay sales tax,
claiming the product wasn’t taxable in its state. “We jointly asked for a
tax ruling from the tax authority in that state,” says Linden. “The
customer was right.”
Waterfield advises companies to review the issue of nexus at a minimum of
once every two years. “Companies should keep their information fresh in
their key states, and a quick review should occur prior to any large sale or
purchase of cloud services to ensure if further [state] guidance has been
released,” he says.
Waterfield also suggests that purchasers of cloud services ask their
providers if they plan to assess sales tax and explain the methodology they
use to calculate it. He also believes that purchasers of cloud services must
know in which states a provider plans to assess tax, as “the purchasing
company’s nexus footprint may differ from the seller’s.” This opens the
possibility that the purchaser may be receiving services in a state where
the service is subject to tax but the seller doesn’t have responsibility to
collect it. In that case, says Waterfield, the purchaser will have to
figure out how to pay the tax itself, either by accruing for the tax
liability or by simply writing a check.
In any case, one can imagine CFOs spending a lot more quality time with
their tax experts in the coming months and years. |
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