The North Carolina Department of Revenue issued a determination on whether a taxpayer’s license revenue from its subscription agreements for access to cloud-based software was subject to North Carolina sales or use tax when the subscriber is located in North Carolina.  The taxpayer is the developer and owner of an enterprise software application product used to provide industry services.  Taxpayer sells a web browser-based computer application.  This type of application software is commonly referred to as SaaS, or software as a service, and is entirely cloud based and accessible via an internet connection.  The taxpayer’s software is placed on taxpayer-owned servers that were physically outside of North Carolina.  Customers are charged a monthly subscription fee for use of the taxpayer’s services.  Although customers are granted access to the software with subscription, the software is not transferred to the customer and nor can they download, copy or modify the software.

According to the North Carolina Sales and Use Tax Act, state, local, and applicable transit sales and use taxes are imposed on a retailer engaged in business in the state on the retailer’s net taxable sales or gross receipts of tangible personal property, certain digital property, and certain services at the percentage rates listed in subdivision N.C. Gen. Stat. § 105-164.4(a) and the applicable local and applicable transit rates of sales and use tax.

The Department held that North Carolina does not currently impose sales and use tax on revenue generated from access to cloud-based software, which was accessed via internet connection.  The taxpayer’s revenue was based on agreements that only granted a license for access to cloud-based software, and nothing more. In addition, the taxpayer had not established nexus with the state physically and the software described in this letter ruling was not subject to tax due to it not meeting the qualifications of taxable tangible personal property.

If you have erroneously remitted taxes on qualifying cloud-based software, you may qualify for a tax refund.  To apply for a tax refund with the North Carolina Department of Revenue fill out the application which can be found here NC-19 Claim for Refund of Taxes. A qualified tax attorney can assist with the execution of the application and potential questions or concerns that may arise in the process.

Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.