Businesses are starting to move more of their operations to the “Cloud” and hire “Cloud” vendors to provide an increasingly diverse number of services. While engaging these vendors may result in significant business benefits, buyer beware. If you’re not careful, you could end up being required to register as a sales tax vendor and collect sales tax in states you never anticipated.
Why? These cloud vendor agreements may result in the cloud vendor relationship creating state tax nexus in remote states due to the vendor’s activities in those states. Such cloud vendor agreements may create a principal-agent or lessee-lessor relationship between your business and the cloud vendor.
For example, let’s say a cloud vendor IT data storage or software agreement states that the customer is deemed to be renting actual file servers at the cloud vendor facilities in one or more states. Such activities in remote states may be sufficient to create state tax nexus and subject you, the cloud customer, to taxation in additional and unexpected states.
The upshot is that before your business executes any cloud agreement, it is important to have your tax advisor review it to determine whether or not it could cause your business to have nexus in additional states. If you already have existing agreements with cloud vendors, now is the time to review those, too, to determine the potential state tax nexus, filing and liability ramifications arising from those agreements.