Sales and use tax software developer Avalara has signed a strategic alliance with tech industry tax specialist Carolynn Iafrate Kranz to use her database and expertise to help refine Avalara’s cloud-based system.
Kranz is an expert on the taxability of cloud services and digital goods, closely following ever-changing developments in the tax laws across various states and local jurisdictions.
Kranz is founder of Industry Sales Tax Solutions, LLC, which offers a subscription database containing sales and use taxability research data on software-related transactions, digital content and cloud services; along with Kranz & Associates, PLLC, a specialty law firm focused on state and local tax consulting.
Under the partnership, Avalara will receive access to Kranz’s sales tax content for technology and digital products. Kranz in turn will serve on Avalara’s board of advisors and represent the company at industry events.
“This is about having much deeper expertise in the technology industry,” said Brian Austin, director of accountant and industry relations at Avalara. “Carolynn is one of the most foremost experts in the U.S. on the taxability of software, digital goods and cloud services.”
He likened the deal to Avalara’s recent acquisition of Zytax, FuelQuest’s excise tax software, which consolidates sales and use tax with excise tax automation for energy-based tax determination, compliance and collection processing (see Avalara Acquires FuelQuest’s Excise Tax Software).
“We are developing deeper knowledge and content in major vertical areas,” said Austin. “The taxability of cloud services, digital goods and SaaS software is arguably the biggest gray area in the sales tax space today in terms of customers and clients not having an understanding on a state by state basis of how their product or service is being taxed, and also whether what they’re selling is characterized as a product or service on a state by state basis. It’s very complex, and this is a big deal for Avalara in getting a formal agreement in place with Carolynn and getting access to her existing database.”
Kranz’s companies will continue to operate independently. While Avalara’s software will leverage the information in the databases, customers won’t have direct access to the content.
“Our business still stands alone as an individual company,” Kranz explained. “We have a subscription database that has the taxability rules about everything essentially high-tech. We’ve formed a strategic alliance with Avalara where they will have access to our database, and they can use that content in their sales tax engine so that they are providing more streamlined content in this area. They already had a good bit of content in this area, but it allows them to broaden it and use our deep industry expertise and really work off of that. But we will still continue to have our database separately.”
Kranz’s database keeps tabs on the often confusing rules about the taxability of technology services across states.
“The high-technology space is a controversial area,” said Kranz. “New York has a policy that is controversial, to say the least, with regard to cloud transactions. It’s constantly changing, and every day we see new technology models coming out. That technology is outpacing sales and use tax laws. As we see new things that come out, Avalara is going to need to address them in their database, as are we, and we’ll be working together to say what should be addressed, what type of content are Avalara subscribers looking for, what type of content are ISTS subscribers looking for, and working together on that, using the knowledge base of myself and my team on my end with the sales and use tax provisions.”
The taxability of cloud computing and the software as a service, or SaaS, model can be particularly vexing across states, as the software typically resides on a host computer server that is frequently located in another state. “New York’s position from a sales and use tax perspective has been that it is the sale of pre-written computer software,” said Kranz. “It’s controversial because in that instance the customer does not receive anything. Nothing is delivered to them. They don’t have custody, possession or control over the software. They are merely accessing it."
Kranz cited several Administrative Law Judge decisions from recent years. "There was the Voicemate decision [in 2003], and then the SunGard Securities Finance decision just this year," she said. "That was just an ALJ decision, but one that said perhaps New York’s policy is not correct. I understand that is continuing to be litigated, so we’ll see what happens. We’re also seeing that happen in Michigan. We had two cases that just came out in the last few months, the Auto-Owners case and the Thomson Reuters case. Again, we’re looking at software as a service, with some states trying to take the position that it’s the sale of prewritten computer software. We have other states saying no, it’s exempt. New Jersey came out with a technical bulletin this year saying software as a service is not the sale of prewritten computer software, while other states like Connecticut look at this as a computer and data processing service, which they tax at a reduced rate. These three states that border one another demonstrate the complexity in this area. There are very similar sales and use tax positions on what they impose tax on, how they define tangible personal property, yet different positions on the same transactions.”