Executive summary: Cloud storage services may find a new path to an exemption under ITFA
The Louisiana Board of Tax Appeals (BTA) recently determined that a New Orleans sales tax on Apple Inc.’s “iCloud” storage services violated the Internet Tax Freedom Act (ITFA). This appears to be the first time a cloud storage tax was invalidated under ITFA, potentially resulting in challenges to similar taxes in other jurisdictions.
Louisiana Board finds tax on iCloud violates Internet Tax Freedom Act
The Louisiana Board of Tax Appeals has ruled that a New Orleans sales tax on Apple Inc.’s iCloud subscriptions violates the Internet Tax Freedom Act (ITFA). New Orleans assessed sales tax totaling $135,580, plus interest and penalties, against the electronics and software service provider for subscription charges made to city-based customers between January 2016 and October 2018. The charges were specifically for data storage through the company’s iCloud services. Apple appealed the assessments to the board.
The board granted partial summary judgment in Apple’s favor on two grounds. First, the board determined that the city’s sales tax on iCloud storage services violated ITFA. The board agreed with Apple’s argument that ITFA's definition of "internet access," specifically includes "personal electronic storage capacity." The iCloud services which allow customers to purchase data storage were consistent with that definition according to the board. iCloud is a "remote personal electronic storage capacity service" that was pre-installed on every device Apple sold during the audit periods. Users could store a certain amount of content for free but paid a monthly fee to store data over the free data storage threshold.
The board also found that the sales tax at issue was barred because electronic storage services are not one of the taxable services enumerated under state law. Local governments cannot impose their sales taxes on services that are not identified as taxable under Louisiana law.
Notably, New Orleans did not contest the motion of summary judgement on this issue nor did the city appear before the board hearing that considered the motion.
This taxpayer victory highlights both new and old issues with Louisiana’s notoriously complex state and local tax regime. The decision also appears to be the first time a judicial body has ruled that services for cloud storage violates ITFA. Several states subject iCloud services to sales tax, as well as other similar cloud data storage services. However, it was not the sole reason for the partial summary judgment.
Many practitioners and taxpayers think of ITFA as barring discrimination against electronic products and services – which it does. But since 2007, it has also prohibited taxation of charges for internet access which, as the board emphatically stated, includes charges for personal electronic storage capacity. As commerce becomes increasingly digital, state and local tax challenges under ITFA are anticipated to increase and are often cited in major challenges, including more recently, Maryland’s digital advertising tax litigation.
Louisiana local governments cannot tax services unenumerated in state law. But the evolving economy produces new services and new applications of services. Some local governments aggressively attempt to tax services, particularly electronic services, that are not enumerated in Louisiana statutes. This board decision serves as a reminder of the complexity of the taxation of digital goods and services and the importance of tax due diligence when offering new digital products for sale. Taxpayers selling digital products and services should speak to their state and local tax adviser for more information.