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As cloud applications become more prevalent and the line between what is a desktop app and what is a web app becomes very blurry, different patterns for design, security, privacy and user experience will gain prominence.
As of today, in your own market segment and the broader public in general, do you assume the user knows the difference or the opposite? Possibly add how that changes your design.
(I'll add my own experience separate as an answer.)
Many years ago, a in-law of an in-law asked me to help get them a PC. I bought a box and installed an operating system, gave it to the closer relative to deliver. A couple of days later I got a call from the irate end user Demanding "WHERE's 123!?". The boundary between the operating system and applications was not a concept he understood. You just turned on the box and voila! - spreadsheet!.
Although users as a group are certainly more sophisticated, it is still true today that a lot of the boundaries that developers and techies take for granted are not recognized by users.
My impression is that most users nowadays (or course, that's just the ones I run shoulders with) understand that desktop apps are individual things, because they either pay for them or download them on a case-by-case basis.
However, unless you are targeting an audience with a known level of technical knowledge, I would be very reluctant to make assumptions.
The user model might not even see them as different "kinds" of thing.
When somebody uses the web, desktop application, or an iPhone app to use eBay, depending on context, what "kind" of thing is eBay?
I think things like web-based email are good to refer to in this instance. At present some people may be concerned with writing and storing all their documents on a 'Cloud' based app such as Google Docs, but are quite happy to use web based email. It has stopped being either a desktop OR a web app, and is now simply 'My Email'. I believe (for better or worse) that the same will happen with web apps.
This really depends on the experience of how the user is being shown the two applications. If you are showing the user two sets of static views (which is how I assume the TurboTax test went), then it definitely could be hard to tell. I assume that's how TurboTax tested because you stated that they used focus groups, which means that they didn't actually have the people using each system to get those results. You put the same people in front of a plain old ordinary computer with one or the other running, a majority will be able to identify one as an application and the other as a website. Users may not know the terms used (as the Google video shows), but they definitely can tell when they are using an application running inside a browser (or whatever term they use to represent that). The browser "artifacts" are easily identifiable by even the most basic user.
Like I said before, if you are just showing the users the interfaces of the applications themselves, not what it actually looks like on the screen, then yes, I think it can be very difficult to differentiate them. I mean, it really isn't that hard to make something within a browser look like a real application, even using pure HTML and Javascript (and even easier with Flash/Silverlight), but on the actual screen, they will see the difference. Some people may not, but the majority definitely will.
At Turbotax they had a desktop app and a web app. The focus groups they used to test showed that users couldn't tell the difference conceptually or even by showing them both and trying to pick out which was which. In fact, the best image used to sell Turbotax Online, was a picture of a box that you buy with the desktop version. (Large scale testing)
At Marketo, my own training with users has proven to me that more than half of users get very confused when you ask questions about "where is the data, on your desktop or on the server?". "My Screen" is where the users I have trained think the data is. (Small scale testing)
For years, I couldn't convince family members that AOL (all of it) was not the internet and all of that content was not installed on their personal machines. (Annecdotal)
Please watch this video of Google employees asking random people what a browser is. http://www.youtube.com/watch?v=o4MwTvtyrUQ&feature=player_embedded To me, this tells the whole story.
My answer: Don't assume they know the difference.
Often web-apps have their data storage on some server. If the connection to the server goes away, the app is of limited use.
Desktop apps often have some local storage / cache that allows for some functionality to still work even without a connection to the central server.
Take an imap mail client and a web client for as examples.
Here users do know the difference - perhaps less in the terms of "desktop" and "web".
On the other hand, I think users know the difference between running an app within their web browser and on that they start on their desktop.
This recently got a little blurry with the iPhone allowing to install web-apps like native ones and with html5 allowing for some databases though.
