Arizona Court Upholds Taxation of Cloud Software Licenses

Cloud software is becoming more popular and convenient for users, but it also poses some challenges for tax compliance. Different states may have different definitions and rules for how to tax cloud software, and sometimes these rules are based on outdated laws or court decisions.

One example of this is the recent case of ADP LLC v. Arizona Department of Revenue and City Of Phoenix, where an HR software company challenged the taxation of their sales of software licenses in Arizona. The company argued that their software was not tangible personal property, and therefore not subject to the state’s transaction privilege tax (TPT), which is a tax on the privilege of doing business in the state.

However, the Arizona Court of Appeals disagreed with the company and ruled in favor of the Department of Revenue. The court said that the software was tangible personal property and that the licenses to access the software were taxable as rentals of tangible personal property under the TPT. The court also mentioned that the company’s customers had exclusive use and control over their own login to the software and that the software was not a service.

The court based its decision on prior rulings by the state and rejected the company’s attempt to use a different definition of software that was only applicable for property tax purposes. The court also denied the company’s petition for review, meaning the decision is final and binding (1 CA-TX 21-0009, Arizona Court of Appeals, Division One).

This case shows how important it is for taxpayers to understand how each state taxes cloud software, and how to comply with the different definitions and requirements. Depending on the state and the circumstances, cloud software may be classified as a service, tangible personal property, a digital good, or a rental. Taxpayers should also be aware of the potential changes in the tax laws or interpretations, as states may update their rules to reflect the evolving nature of cloud software.

Disclaimer: Our attorney wanted you to know that no financial, tax, legal advice or opinion is given through this post. All information provided is general in nature and may not apply to your specific situation and is intended for informational and educational purposes only. Information is provided “as is” and without warranty.

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