Vermont now taxes prewritten ‘cloud’ software after session-law repeal, tax expert says

The Ways & Means Committee heard that prewritten software accessed remotely — commonly called "the cloud" — is now subject to Vermont sales tax following a repeal of a prior session law.

Kirby, a committee staff member who led the explanation, said the change followed repeal of an older session law and a clarifying sentence added to the sales-tax definitions. "Before last year in Vermont, sales tax applied to downloaded software from the Internet," Kirby said. "But because of some session law ... prewritten software that's accessed remotely ... was not taxable." Kirby added that repeal of that session law made remote access to prewritten software taxable.

The committee was given examples of products that are taxable under the current scheme: off-the-shelf programs for office work (spreadsheets and word processing), accounting software, video games and web browsers. Kirby said custom software — software built specifically for a single customer — is not taxable under the state’s definition, and neither are digital photographs or service activities such as software development and technical support. "When the company is offering a mixture of all these things to a customer, they'd have to itemize that stuff out and collect tax for the parts that are taxable," Kirby said.

Members raised implementation and enforcement questions. A committee member asked whether charges from a cloud host such as Amazon Web Services to host previously purchased software would be taxable; Kirby said formal interpretations are the Department of Taxes' responsibility and that taxpayers can request formal rulings. "I checked last time I checked, it's been a couple months. There haven't been any formal rulings issued relating to this," Kirby added.

The committee also discussed sourcing and the related use tax. Kirby explained that where software is accessed generally determines sourcing for sales tax — if the software is accessed from Vermont, it is Vermont-sourced. The chair and members discussed remote employees and software licenses, and Kirby said use tax can apply when a Vermont user uses an item purchased elsewhere without tax paid at purchase. "For use tax, if you go to New Hampshire, you buy some furniture, you bring it back to your home in Vermont ... You're supposed to look that use tax on your income tax return," Kirby said, adding that Vermont's compliance on that reporting historically has been better than many states.

Committee members asked whether existing sales-tax exemptions apply to this class of transactions. Kirby said general sales-tax exemptions apply: federal government purchases for use in Vermont are exempt, as are purchases by the state and other exempt entities covered under existing law. He did not identify any specific exemption that applies only to remote prewritten software.

The committee did not take formal action; members identified follow-up items for the Department of Taxes, including whether the department has issued formal rulings and how collections from the change are being reported.

Questions remaining for staff and the department include whether hosting charges for customer-owned software are taxable in practice and the extent to which collections are being separately tracked in sales-tax totals.