Some features of Amazon’s cloud computing services are taxable under Iowa’s new rules regarding digital products and services, the state revenue department ruled.

The Iowa Department of Revenue issued a declaratory order following a request from Amazon Web Services Inc. The tech giant asked for guidance on the taxability of its Amazon Simple Storage Service (S3) and Amazon Elastic Compute Cloud Service (EC2) under Senate File 2417, a broad tax reform measure enacted last year that expanded the sales and use tax regime to digital goods, ride-sharing services, subscription services, online sellers, and online travel.

The revenue department found charges to Iowa users of S3 services are taxable under S.F. 2417 and told the company to start collecting taxes Jan. 1, as required by the law. S3 operates as a remote storage service, allowing customers to store and retrieve data, applications, software, and other electronic files through an internet connection.

The department noted that S.F. 2417 added “storage of tangible or electronic files, documents, or other records” to the list of services subject to sales tax. It added S3 “fits squarely” within the category of services the legislature intended to tax when it passed the law.

The department’s order was published Feb. 6, but dated Dec. 18, 2018. The order was signed by former revenue director Courtney Kay-Decker, who stepped down after eight years on Jan. 2.

Amazon didn’t respond to Bloomberg Tax’s request for comment.

Not a Digital Product

The department, however, said Amazon doesn’t have to collect taxes for EC2, which is regarded as “Infrastructure as a Service” (IaaS). Under IaaS, cloud service providers such as Amazon supply customers with storage space and processing power on a network to run software, applications and operating systems.

In its petition before the department, Amazon argued EC2 transactions constitute sales of computer-related services rather than sales of a digital product. To the extent customers are purchasing remote computing power rather than a digital product, the company argued the transactions shouldn’t be subject to Iowa’s sales tax.

Kay-Decker agreed, writing “EC2 offers processing power as a service, and does not constitute the sale of tangible personal property, specified digital products, or any enumerated taxable services.”

Amazon also requested guidance regarding data transfer fees charged as part of its S3 and EC2 services. Amazon charges data transfer fees to customers for the privilege of accessing or moving content in different data centers, requesting that data be copied or moved within Amazon’s network, and downloading stored data.

Kay-Decker determined that such fees are included in the sales price of the underlying S3 and EC2 services. In this regard, the tax treatment of data transfer fees depends on the taxability of the underlying service.

“Having concluded EC2 is not a taxable service, data transfer fees associated with EC2 will not be subject to Iowa sales tax beginning January 1, 2019. However, data transfer fees associated with AWS’s S3 service will be subject to Iowa sales tax beginning January 1, 2019,” Kay-Decker wrote.

The department also rejected Amazon’s bid for a blanket exemption from collection duties for its cloud computing services. Amazon requested a finding that its customers qualify as exempt “commercial enterprises,” but Kay-Decker said Amazon had failed to show how it would be adversely affected without the exemption.