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The Storm of Cloud Computing Taxation

Posted on July 17, 2017 by Ben Livni

I. Introduction

Cloud computing — a recent advancement in the technological revolution — has been challenging for taxpayers, lawmakers, and administrators. The difficulty of applying traditional state sales tax principles to cloud computing transactions is complicated by the shift of many tangible goods and downloaded software into virtual services.1

The tax system survived previous drastic shifts in the economic landscape caused by the agricultural and industrial revolutions by adapting to the unique products born out of those revolutions.2 However, traditional products and goods evaporated into services that can’t be touched, measured, tracked, or confined to a specific geographic location.3 For the first time, our modern tax system must weather the challenge of characterizing indiscernible and indistinct services that have indefinite locations.4

As the economy shifts from reliance on tangible goods and downloaded services to virtual services, states are challenged to capture sales tax revenue from traditional businesses.5Because states generate more than one-third of their revenue from sales tax, they must offset the loss of sales tax revenue earned from sales of traditional goods by levying a sales tax on virtual services while still encouraging in-state investment and innovation.6 The state sales tax system, as it exists in the cloud computing environment, is analogous to Darwin’s theory — if the tax system cannot adapt to its new environment, it will not survive.

This article discusses why state sales tax regimes are inadequate to prescribe sales tax on cloud computing transactions in a manner that encourages investment and innovation and increases tax revenue. Section II explains cloud computing and describes the three most prominent services — Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). Section II also highlights the unique characteristics of those services, which strain state sales tax regimes, and explains how state sales tax operates. Section III highlights permutations in state sales tax as applied to cloud computing transactions and explains the shortcomings of those regimes. Section IV examines how the state sales tax landscape affects businesses operating in the cloud and how it compromises the goals of state governments.

Finally, Section V proposes that an established uniform state sales tax regime for characterizing cloud computing transactions will clarify the tax environment. A single national manual prescribing state sales tax characterization to virtual services will ease tax compliance, increase tax revenue, and encourage investment and innovation. By establishing cloud computing taxation principles in the Streamlined Sales and Use Tax Agreement and expanding its reach to all 50 states, the SSUTA will illuminate the cloudy tax climate and guide businesses to more certain and stable tax compliance.

II. Background

The National Institute of Standards and Technology defines cloud computing as:

a model in enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (for example, networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. 7

Cloud computing is more easily understood as software, hardware, and other computing resources that are hosted at a central location by a third party specializing in providing these virtual services to multiple unrelated users by remote access through the internet.8

Cloud computing presents unique tax challenges, such as those related to the ownership of intellectual property in the cloud and on servers, the location of customer and vendor access, and varying definitions of cloud computing transactions for business models in some industries.9

How Does Cloud Computing Work?

Before cloud computing, computers had limited capability that required the same software to be bought and downloaded individually onto each of a business’s computers.10 If new software was adopted, or if the business’s software crashed, it had to be reinstalled on all computers.11 Moreover, businesses were less flexible because if an employee wanted to access data or a software application, the employee would have to carry around the computer storing the data or software.12 Also, employees of businesses with offices in different locations could not build on each other’s work in real time.13 Only after an employee finished working could she save the changes to the server servicing her office and transmit the data to a server servicing another office’s computing infrastructure.14Scalability was very costly and timely — if a business grew quickly, it would have to spend time and money purchasing and maintaining additional computer infrastructure.15 These costs included additional equipment, real property, renovations to existing offices, and new personnel to support the larger computing framework.

Cloud computing offers businesses the benefit of offloading their servers, data storage, software, and network to third parties that can provide these services over the internet.16Businesses can forgo the time and capital expenditure associated with purchasing and maintaining the hardware and software they need and spend more time and capital on their business’s core competencies.17 Cloud computing provides businesses with instant scalability because they can easily increase or decrease the computer resources handled by cloud service providers to accommodate businesses in times of growth or economic downturn.

Businesses enjoy increased flexibility provided by cloud computing because their employees can access company-related software, data, and computing resources simultaneously from anywhere in the world.18 Upgrading or changing software or hardware is done only on the network maintained by the cloud service provider, and changes to work product are available in real time.19 Moreover, since cloud computing provides a borderless computing network, businesses operating in the cloud can easily engage in commercial transactions across the globe.20 Finally, with cloud computing businesses can diversify the geographic location of their business segments and still maximize operating efficiency.21

By combining a shared pool of computing resources composed of networks, servers, storage, and software applications, cloud service providers optimize the efficiency of computer resources.22 In many cases, the data being accessed by cloud users is not stored on just one server but on many servers in different locations, all of which the user can access.23 The cloud computing system continuously copies and transmits the users’ software and data across the network, and users are directed to the server that can most efficiently meet their needs.24 However, neither cloud service providers nor users are aware which server is being used or by whom at any given time.25 By avoiding reliance on one server, businesses are better protected from losing data and software applications due to natural disasters or computer hackers.26

B. The Three Clouds

Three prominent products or services dominate the cloud computing market: SaaS, PaaS, and IaaS.27 SaaS offers businesses the opportunity to remotely access software applications made available by the cloud service provider over the internet.28 A cloud service provider writes a software application, hosts it on a server, and makes it available over the internet.29Rather than purchasing software, customers subscribe to SaaS offerings.30 The service removes the need for organizations to install and run applications on their own computers or in their own data centers. Therefore, users can access SaaS applications from anywhere they can access the internet, and customers can rely on the SaaS provider to automatically perform software updates and maintain the supporting infrastructure.31 A common example of a SaaS service is Salesforce, which enables businesses to collect information about customers and prospects in a single online platform and authorizes users to access that data on any connected device at any time.32 Another popular example of SaaS is Microsoft’s Office 365, which allows users to create, edit, and share content from any device in real time.33

PaaS provides users with a remotely hosted platform to create, run, and manage software applications without developing and maintaining virtualized servers, product development tools, and operating systems. PaaS users generally do not manage or control the cloud infrastructure, but users maintain control over their own applications.34 Apple Inc.’s application store and the Google App Engine are examples of PaaS providers.35

IaaS provides virtualized hardware over the internet, which allows users to outsource the computing equipment needed to support their internal computing network.36 This includes servers, computer processing power (bandwidth), data center space, and network equipment.37 The IaaS provider pools the hardware resources from various servers and networks located across several data centers and is responsible for maintaining the resources.38 The user, however, controls the operating systems, storage, and applications hosted by the IaaS provider39 and runs websites, apps, and data storage without expensive capital expenditures.40 Leading IaaS providers include Amazon Web Services, Windows Azure, and Google Compute Engine.41

C. State Sales Tax

State sales tax is a tax assessed by the state when a “definable taxable sale” is made within its taxing jurisdiction.42 Varying by jurisdiction, the character of a taxable sale may be tangible personal property, software, or a service.43 Generally, transactions involving tangible personal property are subject to state sales tax and sales of services are not.44

Regarding software, most states distinguish between canned software and customized software.45 Canned software is pre-written and purchased off the shelf — for example, Microsoft Word. Customized software is specially created to meet the user’s needs.46 While every state that has a sales tax imposes taxes on sales of pre-written software when delivered in a tangible form, most states treat customized software as a nontaxable service.47 Additionally, some states have enacted provisions characterizing “electronically delivered (downloaded) software” as a taxable service.48

In theory, the taxability of cloud computing transactions for state sales tax purposes is no different than the taxability of any other transaction. The analysis should be simple: First, determine the character of the transaction; and second, determine where the transaction is sourced.49

The character of the transaction not only heavily influences where a transaction is sourced, but also determines whether the transaction is subject to state sales tax.50 Where a transaction is sourced determines which state’s sales tax laws apply and, sometimes, whether the transaction is taxed at all.51

D. Why Tax the Cloud?

The U.S. market for cloud computing, which had revenue of $203.9 billion in 2016, is expected to rise to $241 billion in revenue by 2020.52 Cloud computing is becoming infused in day-to-day business operations and is changing our economy to one that relies on digital services.53 For example, according to the United States Bureau of the Census $4.1 trillion worth of retail and wholesale transactions were conducted over the internet back in 2010.54

State and local governments are concerned because cloud computing is eroding their tax base. SaaS providers offer users music and movies as streamable services through the internet. These services were once offered as tangible products, such as cassette tapes, whose sale was taxable.55 SaaS services also offer users virtual cabinets (Dropbox), and virtual photo albums (Apple’s iPhoto), and other digital services.56 IaaS providers offer users computing resources as a service over the internet, so businesses no longer need to own the computing resources they use.57 Because many tangible products are no longer being sold, but instead offered as services, fewer transactions are subject to sales tax.58 The decrease in tax revenue caused by cloud computing has created significant problems for states, which will lose an estimated $27 billion to $33 billion in tax revenue by 2022.59

States faced with increasing budget deficits and decreasing tax bases rushed to expand sales taxation to include cloud computing services.60 The result was an “inconsistent and patchwork approach” that provides little guidance to businesses operating in the cloud.61Businesses require certainty and stability. Only a clear and timely state sales tax regime will provide them with a smooth transition into a digital service economy. A coordinated effort among the states will make compliance easier and encourage cloud service providers and users to locate in the United States. This will increase the tax base and encourage investment and innovation.

III. The Challenges of Taxing Cloud Computing Transactions

Technology evolves faster than the law.62 When vendors began providing access to software and computing resources over the internet, states immediately faced the challenge of applying traditional tax laws to virtual services.63 The undefined nature and unidentified location of cloud computing are the sources of today’s taxation challenges because cloud computing transactions do not fit neatly into traditional tax structures.64

The challenge for states is to characterize a cloud computing transaction as either a sale or lease of tangible personal property, a sale of a software, or a sale of a taxable or nontaxable service.65 The challenge is increased because each state may define the transaction differently.66 To better understand the challenge, the following sections will highlight the discrepancies for taxing cloud computing that exist among the states. They show that traditional state sales tax characterization principles are unsuccessful when applied to cloud computing transactions.

A. The Modern Approach to Characterizing Cloud Computing Transactions

Some states have cloud computing tax characterizations.67 For example, Tennessee updated its statutory definition of software to define SaaS and clarify its taxability.68However, even among such states the tax treatment is muddled and inconsistent. Tennessee still tries to fit IaaS transactions into traditional tax characterizations, considering whether they constitute a transfer of tangible personal property when analyzing state sales tax consequences.69

The problem with treating different cloud computing transactions differently under the tax law is twofold. First, in all cloud computing transactions, the services are almost certain to overlap. Second, the differences between the categories of cloud computing have blurred recently and will continue to become less clear.70 Companies are left in a bind, having to determine whether a transaction that involves SaaS and IaaS services should be characterized as one and not the other, or worse, the apportionment of each service included in the transaction.

B. Service or Tangible Personal Property

Some states use the essence of the transaction approach to determine whether a cloud computing transaction should be characterized as tangible personal property or as a service.71 The Colorado Department of Revenue considered whether the character of a “hosted software solution sending, receiving, and tracking large digital files over the internet” was taxable as tangible personal property or as a nontaxable service. The state characterized the transaction as a service and explained that the essence of the transaction is a digital service, similar to an email service, and not a lease of computer servers or software.72

C. Software vs. Goods and Services

In some states, state sales taxation hinges on whether cloud computing transactions are characterized as software transactions or transactions for goods and services.73 Some states that draw this important distinction look at the essence of the transaction to properly characterize cloud computing transactions.74

In Massachusetts, cloud computing transactions that enable users to access software on a remote server are characterized as pre-written software and are subject to state sales tax under the definition of tangible personal property.75 However, if the essence of the transaction is not for the use of software but to “acquire a good or service other than the use of software,” state sales tax does not apply.76

The Massachusetts Department of Revenue considered a cloud computing transaction that provided customers with financial information about businesses to reduce supplier risk and increase profitability.77 Customers could also purchase “workflow add-ons” that enabled them to “automate credit decisions, enter account information, and create customizable credit applications.”78 The department found that the essence of the portion of the transaction that provided customers with information was a use of the cloud service provider’s database, rather than software.79 Therefore, it was a nontaxable service.80However, the essence of the portion of the transaction providing workflow add-ons was deemed an access of the cloud service provider’s software.81 As such, it was characterized as pre-written software and was subject to state sales tax under the definition of tangible personal property.82

D. Tangible Personal Property

Chicago took a broad interpretation of “tangible personal property” and determined that cloud computing services are subject to sales tax under the definition of amusements and personal property leases. Such an expansive legal interpretation reduces certainty and stability for businesses operating in the cloud, because traditional tax definitions are no longer reliable.83 Rather than comply with the sales tax, cloud service providers such as Netflix and Amazon.com gave significant pushback.84 Additionally, Netflix stated that it would pass on the tax through its customers’ monthly fees.85

E. Pre-written Software

While most states tax the sale of pre-written software under the definition of tangible personal property,86 some consider pre-written software a separate characterization. The distinction is important because the character has different implications for where the transaction may be sourced. Also, unlike tangible personal property, characterizing cloud computing transactions as pre-written software is not always dispositive.87

In Missouri, sales of pre-written software are subject to state sales tax only if the software is delivered in a tangible medium.88 In one case, the Missouri Department of Revenue characterized a cloud computing service that allowed users to “manage their customers’ billing and operational requirements” as pre-written software. The transaction was not subject to state sales tax because the software was provided over the internet, rather than in a tangible medium.89

Attempting to characterize cloud computing transactions as pre-written software is like attempting to “fit a square peg into a round hole.”90 First, unlike pre-written software, cloud computing transactions are multifaceted.91 Beyond software, cloud service providers may offer users data storage and backup recovery, as well as servers, and computer networks.92Second, businesses own pre-written software, download it onto their computers, and are liable to maintain the software.93 However, cloud users merely access the software and computing resources owned by the cloud service provider over the internet.94 As such, the cloud service provider is still responsible for maintaining the software, hardware, and computing infrastructure.95

F. Nontaxable Service

If a cloud computing transaction is not characterized as some form of tangible personal property, the likely alternative is to call it a service. While some states exempt services from state sales tax, other states distinguish between taxable and nontaxable services.96

New York classifies cloud computing transactions as either nontaxable data processing services or taxable information services by examining the object of the transaction.97 The Division of Tax Appeals characterized cloud services offering data backup and recovery as nontaxable data processing services because the primary purpose of the transaction was not “the sale of new information,” but rather the user receiving a copy of its own data.98 It is fickle distinctions such as these that perplex businesses operating in the cloud.99

G. Cloud Computing as an Intangible

New Mexico addressed the character of cloud computing transactions that allow users to “access their computers remotely, host meetings, and host training.”100 The state characterized the transaction as neither tangible personal property nor pre-written software nor a service. Instead it was characterized as licensing an intangible — a taxable service in the state.101

IV. Consequences and Ramifications

The chaotic group of techniques used by states to characterize various cloud computing transactions results in an accounting nightmare for cloud providers and their clients.102 Due to the borderless nature of cloud computing, businesses operating in the cloud may be forced to comply with sales tax guidance in multiple states for each type of cloud service they use or provide.103

The tax framework is constantly subject to change because most states have addressed the character of cloud computing transactions through means that establish mere persuasive authority.104 Businesses must painstakingly consider states’ private letter rulings and informal administrative guidance and arbitrarily characterize their transactions.105Compliance costs may also come in the form of compiling records, acquiring and maintaining tax accounting systems, and completing complicated state sales tax forms.

The resources companies must use to survive in the cloud computing tax climate contravenes the reason that businesses implemented cloud computing in the first place — to avail themselves of more time, money, and energy to focus on their core competencies.

A. Consumer and State Consequences

Illusive state sales tax regimes impose additional costs on businesses operating in the United States.106 Businesses generally attempt to pass on these costs to their customers. Netflix and Amazon came forward with their plans to push additional tax expenses onto their subscribers’ monthly bills.107

Additionally, businesses may recover the excess costs by reducing economic activity in a given state.108 A reduction in economic activity may have several repercussions.109Businesses may halt innovative efforts by reducing research and development expenses, or they may make up the excess costs by employing fewer people.110 Alternatively, businesses may reduce in-state investment in equipment, building, and real property, all of which would otherwise create jobs for state residents and generate sales tax revenue.111

B. Efficient and Effective Tax Compliance

Beyond causing businesses to expend time, money, and energy, a complicated tax regime reduces compliance.112 To some extent, businesses do not pay taxes because they do not understand the tax laws. A CFO of a Connecticut-based medical device company that uses numerous SaaS applications said the company regularly struggles to make sense of which transactions are taxable and who must pay.113 State tax agencies must expend additional resources to meticulously examine convoluted tax returns to ensure that businesses characterized cloud computing transactions in accordance with state law. Additionally, expenditures may increase exponentially due to increased enforcement efforts against many businesses that fail to comply with state sales tax laws.

C. Uneven Playing Field

The state sales tax issue is particularly important because the competitive advantage derived from cloud computing is necessary for businesses to survive in this economy. With cloud computing, even small businesses can go global in days,114 which will subject them to multiple state sales tax regimes.

As it stands, the state sales tax landscape practically requires the help of accountants and lawyers to navigate multiple sales tax regimes and ensure tax compliance. Beyond mere compliance costs, well-resourced businesses may incur costs to determine alternative methods of complying with state tax laws to effectuate the most favorable outcome.

Small businesses do not have the resources to pursue similar avenues. As such, they are subjected to less favorable tax structures and proportionally higher sales tax payments.

Without assistance or clarification, small businesses are more likely to inadvertently violate tax laws or underpay their state sales tax liability.115 This results in wasted time and money spent resolving the tax penalties, both of which are essential for small businesses to succeed. The current state sales tax system causes a disparate negative impact for smaller businesses because they lack the resources of large corporations to help them navigate the state sales tax environment.

D. The Bottom Line

State sales tax consequences are created with almost every retail transaction. As described above, uncertain and unstable state sales taxes increase transaction costs and decrease sales for businesses operating in the cloud. Timely and expensive tax compliance forces businesses to consider operating in foreign jurisdictions with more certain and stable tax regimes. Alternatively, foreign companies providing cloud computing services may choose to offer their services only to citizens residing in jurisdictions with clearly established sales tax treatment.

Utimately, the state sales tax system works against what it was set out to do: fix states’ budgetary deficits by capturing tax revenue from cloud computing transactions. Instead, the state sales tax system discourages investment, innovation, hiring, and employment, and it decreases the revenue base and unfairly challenges small businesses’ survival in the digital age.

V. Weathering the Storm: Streamlined Sales and Use Tax Agreement

The SSUTA is a pact that several states have adopted to “simplify and coordinate their tax codes so that all types of vendors, from traditional to those conducting trade over the Internet, could easily collect and remit sales tax.”116 The SSUTA solves the most prominent complexity surrounding the state sales system with regards to cloud computing — the lack of uniformity amongst the states — by harmonizing state sales tax through a national dictionary with common definitions for goods and services.117 A simplified and uniform tax code across states would reduce compliance costs for businesses operating in multiple states,118 which, due to cloud computing, is an increasingly large number. Under the SSUTA, such businesses would need to learn and comply with only one set of tax characterization principles.

The reduction in time and expense achieved through streamlining will “level the playing field” between well-resourced corporations and small businesses. Also, it will restore the purpose of cloud computing, allowing companies to focus on their core business. Finally, it will reduce the resources state governments must use to enforce sales tax and collect payments.

Nonetheless, the SSUTA board has put off making a recommendation on taxing cloud computing, pending action in Congress on legislation that would standardize state sales taxes on internet transactions. If Congress passes that legislation, then the cooperative effort of all 50 states adopting the SSUTA may open a pathway to uniformly taxing internet services.119 States would still be able to dictate whether the goods and services are taxable.120 However, they would commit to the agreed-upon terms and definitions. The certainty and stability businesses would enjoy would encourage them to locate their operations in the United States. This will increase the state sales tax revenue base and create more jobs, which will lead to increased investment, innovation, and ultimately state sales tax revenue. Not only will the SSUTA allow businesses using cloud computing more certainty and stability, but it will also prevent online retailers from avoiding sales tax on transactions to which local retailers would otherwise be subject.121

Without congressional action, it may be difficult for states to implement the SSUTA. States would likely face legal challenges as legislation affecting interstate commerce generally falls under the commerce clause of the Constitution.122 Nonetheless, historically, Congress has experienced difficulty in passing legislation affecting state sales tax,123 perhaps because such authority has traditionally been governed by the states. Additionally, some states and local governments oppose the SSUTA because of fear that administrative obstacles to streamline sales taxes may be too costly. States would be required to share the administrative costs of implementing and facilitating the SSUTA.124

VI. Conclusion

As the world’s economic landscape shifts from one that relies on goods and downloaded software to one dominated by virtual services, cloud computing is being implemented by businesses and individuals alike. Every business, large or small, in every industry must evolve to operate on the cloud or perish. As cloud computing becomes a bigger part of the global economy, states are having more difficulty collecting tax revenue. They are in dire need of a way to stop the bleeding in their budgets. Businesses thrive on certainty and stability. To provide that, state tax departments should work together to come up with a national regime to characterize cloud computing transactions.

Establishing uniform characterization principles in the SSUTA that address cloud computing transactions is the most efficient and effective approach to reach all 50 states. A unified front at the state level regarding cloud computing transactions is necessary for states to attract businesses, encourage investment and innovation, and ultimately increase tax revenue. Amid a cloudy international climate, a uniform state sales tax regime that addresses cloud computing transactions will shed light on America at the forefront of the tech-centric global economy.


1 Scott Huntington, “How Does Cloud Computing Work?” Cloud Academy Blog, June 23, 2016.

2 U.S. Department of Treasury, “History of the U.S. Tax System” (Aug. 2003).

3 Rachel Hyde, “How to Tax the Cloud: An Economic and Legal Riddle,” Investopedia.com (Sept. 16, 2015).

4 Treasury Department, supra note 2.

5 Liz Farmer, “The Struggle to Tax the Cloud,” Governing, June 2015.

6 See Urban Institute & Brookings Institution Tax Policy Center, “How Do State and Local Sales Taxes Work?” (undated). States collected $394 billion — 34 percent of own-source general revenue — from sales taxes in 2013.

7 Peter Mell and Tim Grance, “The NIST Definition of Cloud Computing” (Oct. 7, 2009).

8 See “Cloud Computing: State Sales and Use Tax Implications,” Alvarez & Marsal Holdings LLC (Jan. 26, 2013).

9 Elaine S. Povich, “Taxing the Cloud: States Are Looking at How to Do It,” The PEW Charitable Trusts Stateline (Oct. 26, 2015).

10 David Shakow, “The Taxation of Cloud Computing and Digital Content,” U. Penn. Legal Scholarship Repository 1, 3 (July 18, 2013).

11 James A. Martin, “Should You Move Your Small Business To Cloud?” PCWorld.com, Jan. 29, 2010.

12 Id.

13 See Tara Swords, “What Is Cloud Computing?” Every Day Connected (undated).

14 Eric Griffith, “What is Cloud Computing?” PCMag.com, May 3, 2016.

15 Rick Blaisdell, “Cloud Computing Enables Business Scalability and Flexibility,” Rick’s Cloud, Sept. 6, 2012.

16 Chris Woodford, “Cloud Computing,” ExplainThatStuff.com, Aug. 13, 2016.

17 “Revolution Not Evolution: How Cloud Computing Differs from Traditional IT and Why it Matters,” Rackspace.com (2017).

18 Griffith, supra note 14.

19 Shakow, supra note 10.

20 See Vlad Frants, “The Evolution of Cloud Computing Taxation: Characterizing and Sourcing Cloud Computing Payments in an Uncertain World,” American Bar Association Young Lawyers Division (undated).

21 See Sara Angeles, “Cloud Computing: A Small Business Guide,” Business News Daily, May 1, 2013.

22 “What Is Cloud Computing?” Amazon Web Services (listing increased speed and agility as one of the six benefits of cloud computing).

23 Erik Anderson, “What Is Cloud Computing?” IBM Cloud Computing News, Mar. 6, 2014.

24 Shaim Hossain, “Cloud Computing Basics,” IBM Cloud Computing News, Feb. 4, 2014.

25 Id.

26 “Why Move to the Cloud? 10 Benefits of Cloud Computing,” Salesforce.com, Nov. 17, 2015.

27 “Cloud Computing Risks/Challenges-Legal & Tax Issues: My Cloud, Your Cloud, Whose Cloud?” Nishith Desai Associates (Mar. 2013).

28 Alvarez & Marsal, supra note 8.

29 Frants, supra note 20.

30 Margaret Rouse, “Software as a Service (SAAS),” TechTarget.com (2014).

31 Id.

32 Vadim Vladimirskiy, “10 Popular Software as a Service (SaaS) Examples,” Nerdio.com, Oct. 20, 2016.

33 See Microsoft Azure, What is SaaS? Software as a Service (undated).

34 See Mell and Grance, supra note 7.

35 Christine Burns, “10 Most Powerful PaaS Companies,” Network World, June 4, 2014.

36 See Frants supra note 20.

37 Jennifer Jensen, “How Does One Tax The Cloud?,” PwC (Jan. 2012) (Reprinted from AICPA Tax Advisor, Dec. 2011).

38 See Microsoft Azure, “What Is IaaS? Infrastructure as a Service” (undated).

39 See “What is IaaS?” Interoute.com (undated).

40 See Frants supra note 20.

41 Rouse, “Infrastructure as a Service (IAAS),” TechTarget.com (2014).

42 See Walter Hellerstein and John A. Swain, “Taxable Sales of Tangible Personal Property as Applied to Various Businesses, Trades, and Occupations: Cloud Computing,” Thomson Reuters Tax and Accounting Sales and Use Taxes (2016).

43 Id. at 4. (For example, in Colorado, sales and use tax apply to the sales, use, storage, and consumption of tangible personal property, but not to services.).

44 See Leonard J. Nitti, “The Taxation of Cloud Computing,” New Jersey CPA (Nov./Dec. 2014); and Hellerstein and Swain supra note 42, at 13.

45 See Kristin Korpo, “Software Taxability 101,” Sovos, Feb. 27, 2017.

46 Id.

47 Institute for Professionals in Taxation, “Sales Tax School II, Taxation of Computer Software and Services, ” (undated).

48 See Alesia Lewis, “A Closer Look At Sales and Use Taxation of the Cloud,” The Journal of Accountancy (Mar. 28, 2016) (Some states may treat a cloud offering as a nontaxable service while others may tax the offering as tangible personal property or a taxable service).

49 Frants, supra note 20.

50 See Hellerstein and Swain, supra note 42 at 3.

51 Diana Dibello and Sylvia Dion, “Navigating Nexus: Multistate Business Operations Face a Wide Variety of State Taxes,” Journal of Accountancy, Oct. 31, 2010.

52 “Size of the Public Cloud Computing Services Market From 2009 to 2020 (In Billion U.S. Dollars),” Statista.com (2016).

53 See Joe Mullich, “16 Ways the Cloud Will Change Our Lives,” advertisement by redhat.com in The Wall Street Journal (undated).

54 Steven Maguire, “State Taxation of Internet Transactions,” Congressional Research Service (May 7, 2013).

55 Alvarez & Marsal, supra note 8; and see Povich supra note 9.

56 See Vladimirskiy, supra note 32.

57 Prior to cloud computing, users owned and operated software such as Microsoft Word on their computing infrastructure. However, with the advent of cloud computing, companies offer software like Google Docs — a software owned and operated on Google’s computing infrastructure, which users can access online.

58 See Povich, supra note 9 (through SaaS, companies such as Netflix and Apple’s music service have rendered CDs, DVDs, and thumb drive storage largely obsolete).

59 Hyde, supra note 3; and Arthur B. Laffer and Donna Arduin, “Pro-Growth Tax Reform and E-Fairness,” Laffer Associates and Let Freedom Ring (July 2013).

60 Jeff J. Roberts, “Cloud Tax, The Taxman Comes for Cloud Companies Like Netflix, and Confusion Reigns,” Fortune, Sept. 8, 2015.

61 Laffer and Arduin, supra note 59.

62 Carolynn S. Iafrate Kranz and Iris Kitamura, “Navigating the Cloud: A Sales & Use Tax Guide” (May 1, 2015).

63 Alvarez & Marsal, supra note 8.

64 Lewis, supra note 48.

65 Hellerstein and Swain, supra note 42, at 4.

66 See Jennifer Dunn, “Sales Tax by State: Is SaaS Taxable?” TaxJar, Aug. 9, 2016 (listing the state sales tax treatment of cloud computing transactions in each state).

67 See Kranz and Kitamura, supra note 62, at 1 (Washington state has enacted legislation that expressly taxes cloud computing).

68 Lewis, supra note 48.

69 Id.

70 See Ben Kepes, “Understanding the Cloud Computing Stack: SaaS, IaaS, and PaaS,” rackspace.com, Mar. 7, 2017.

71 Hellerstein and Swain, supra note 42, at 12.

72 Id. at 13.

73 See David L. Welliver, “Sales and use tax on cloud computing — What is it? Is it taxable? Where is it taxable?” Minnesota Society of Certified Public Accountants (Nov. 2015) (Identifying the form and function of the good or service drives the tax ramifications of businesses engaged in cloud computing. The context of the sale is relevant to classifying the good as tangible personal property, software, an information service, or a digital good).

74 Hellerstein and Swain, supra note 42, at 7.

75 Id. at 9.

76 Id.

77 Mary Benton and Zach Gladney, “From the Litigator’s Desks: The Future in State Taxation of the Cloud and Enduring Guiding Principles,” Sales and Use Taxes (June 2016).

78 Id. at 67.

79 Id.

80 Hellerstein and Swain, supra note 42, at 9.

81 Id. at 6.

82 Benton and Gladney, supra note 77.

83 Roberts, supra note 60.

84 See id.

85 Hyde, supra note 3.

86 See Matter of Sungard Securities Finance LLC, No. 824336 (N.Y. Div. of Tax App. 2016) (a cloud transaction providing the user with access to form templates over the internet is taxable as access to pre-written software, which is included in New York’s definition of tangible personal property).

87 Annette Nellen, “Taxes in the Cloud,” Corporate Taxation Insider, AICPA (May 27, 2010).

88 Nitti, supra note 44.

89 See Hellerstein and Swain, supra note 42, at 13. (Similarly, the Iowa Department of Revenue stated that a “taxable sale does not occur when ‘the substance of the transaction is delivered to the purchaser digitally or electronically’”).

90 Scott Drenkard, “A Very Short Primer On Tax Nexus, Apportionment, and Throwback Rule,” Tax Foundation (Mar. 28, 2016).

91 Id.

92 Woodford, supra note 16.

93 See Tony Switajewski, “The Sales and Use Taxation of Software — Software Accessed from the Cloud,” BlumShapiro (June 7, 2012) (explaining the evolution from software taxation to cloud computing).

94 Id.

95 Griffith, supra note 14.

96 Hellerstein and Swain, supra note 42, at 13. In New Jersey, cloud computing transactions generally will not be subject to state sales tax. However, one major exception exists for information services. The state characterized SaaS “providing information to customers by an information provider” as information services.

97 Hellerstein and Swain, supra note 42, at 5.

98 Id. at 8. To further complicate the matter, although the New York Department of Finance found the transaction was a nontaxable service, it ruled that the cloud provider was making a taxable use of the nontaxable service, and therefore the transaction was subject to state use tax.

99 Roberts, supra note 60.

100 Hellerstein and Swain, supra note 42, at 7.

101 Id. at 8.

102 Hyde, supra note 3. Chicago’s approach, extending the local amusement tax to cloud-based delivered content, is distinct from the other characterization approaches taken by states mentioned above.

103 Nitti, supra note 44.

104 See Kranz and Kitamura, supra note 62, at 1 (“Lacking specific legislation, many state taxing authorities increasingly rely on letter rulings, administrative notices and audits to shape their policy regarding the sales and use tax treatment of cloud computing services — all with varying results”).

105 Alvarez & Marsal, supra note 8.

106 Hyde, supra note 3.

107 Id.

108 Chris Edwards, “Our Complex Tax Code is Crippling America,” Time, Apr. 11, 2016.

109 Robert Cline et al., “Sales Taxation of Business Inputs: Existing Tax Distortions and the Consequences of Extending the Sales Tax Business Services,” Council On State Taxation (Jan. 25, 2005).

110 Hyde, supra note 3.

111 Edwards, supra note 108.

112 Id.

113 See Roberts, supra note 60.

114 See Mullich, supra note 53.

115 Donald Marron, “Seven Tax Issues Facing Small Business,” Urban Institute & Brookings Institution Tax Policy Center (Apr. 9, 2014).

116 See Roberts, supra note 59.

117 Povich, supra note 9 . (quoting Utah State Sen. Wayne Harper (R), who sits on the Streamlined Sales Tax Governing Board, “the goal of the Streamlined Sales Tax Board is to . . . create definitions that states and counties can use so . . . they can have uniform standards”).

118 See Maguire, supra note 54.

119 See Povich, supra note 9.

120 Streamlined Sales Tax Governing Board, “What is the Streamlined Sales and Use Tax Agreement?” (undated).

121 See Maguire, supra note 54.

122 Id.

123 Id.

124 See Maguire, supra note 54.