Louisiana Board of Tax Appeals Rules ITFA Prohibits Taxing Cloud Storage

After performing an audit on Apple, the City of New Orleans issued an assessment on September 20, 2021, which included almost $136,000 in taxes on subscription fees for Apple’s iCloud, which Apple challenged. On January 12, 2023, the Louisiana State Board of Tax Appeals Local Division released the Judgment which determined the tax on Apple’s iCloud storage violated the Internet Tax Freedom Act (ITFA). Local Tax Judge Cade R. Cole signed the Judgment and Reasons based on Apple’s Motion for Partial Summary Judgment in the case Apple Inc., v. Romy S. Samuel in her capacity as Collector of Revenue for the City of New Orleans, docket number L01283. In this ruling, Judge Cole found the assessment against Apple had to be reduced by the $136,000 plus applicable penalties and interest because the “personal electronic storage capacity services are not subject to the City’s French quarter Economic Development District sales/ use tax”.

Counsel for Apple argued in this case that iCloud subscriptions should be considered as “Internet Access” under the ITFA definitions, which would prevent individual states or cities from taxing this service. The “iCloud” is a remote personal storage capacity service where users can upload photos, videos, and/or music to remote servers via the internet. Up to 5 gigabytes of storage is granted to users free of charge; users above the 5 gigabyte limit pay between 99 cents and $9.99 per month for additional storage of up to two terabytes. The initial software and functionality come preloaded onto every Apple device, and no additional software is provided, even if the user does purchase the additional storage. The City of New Orleans did not challenge the Affidavit accompanying the Motion for Summary Judgment which made this argument.

Judge Cole’s ruling noted that under the plain language standard of interpretation, Apple’s iCloud should be considered as “Internet Access” because in 2007 Congress expanded the original ITFA definition to include a homepage with personal electronic storage capacity whether provided with or independently of internet access. Further, the Judge pointed out, services are generally untaxable in Louisiana unless they are specifically listed, and personal electronic service is not listed as a taxable service.

As part of the discussion of the judgement, Judge Cole pointed out the specific language of the ITFA has only been considered in passing in other states, such as Massachusetts, where the Appellate Tax Board based their opinion on the delivery method in the case at hand rather than the language of the ITFA. This leaves local judges to interpret based on “plain meaning”, as Judge Cole did in this case. However, “plain meaning” is not always interpreted in the same way, and since this is a federal law, it is likely to receive many challenges as the internet and internet-based storage continue to change and expand. The Supreme Court is currently hearing cases which could significantly change the internet, and though the ITFA is not at issue in the current Supreme Court term, it is not unlikely the ITFA will at some point come up either in the Courts or in a new version of the ITFA. Other taxpayers and businesses who deal with cloud-based services will need to keep an eye out for future local rulings regarding the ITFA and local interpretations unless there is any clarification at the Federal level.

(Judgement on Unopposed Motion for Summary Judgment and Reasons for Judgment on Unopposed Motion for Summary Judgment, Signed January 12, 2023, Local Tax Judge Cade R. Cole, Apple Inc., v. Romy S. Samuel in her capacity as Collector of Revenue for the City of New Orleans, Docket Number L01283)

Posted on February 27, 2023