Tax Analysts Blog

Taxing the Cloud

Posted on Sep 24, 2014

Cloud computing is all the rage, and likely to remain that way. Businesses aren't just implementing cloud computing as an add-on to their current business technology strategy, they’re changing their technology strategies to use cloud computing. Because of this, it’s unlikely that there will be a shift back to traditional software models. (Who really wants to return to a time before Google, anyway?) Suffice it to say, cloud computing is here to stay. And in the next decade, those technologies will continue to develop.

The cloud is not a singular place any more than the Internet is. The cloud consists of thousands of servers located at data centers. Those servers, in a variety of locations, can be harnessed on demand to run tens of thousands of applications accessed by individual users. At any given time, there are millions of users accessing applications in the cloud. In essence, there is a shared infrastructure that works like a utility. Businesses pay only for what they need, upgrades are automatic, and scaling up or down is easy.

To generalize in non-IT-professional terms, cloud computing differs from traditional means of accessing business applications in that cloud computing encompasses off-premise, on-demand computing. Traditionally, businesses had to purchase hardware and software and then have both configured and maintained on their own servers. With cloud computing, a cloud service provider can provide both the software and the hardware necessary for a business to access an application via the Internet.

Historically, state governments have been slow to adapt their tax codes to technology. Most states are just now getting a handle on the taxation of digital products, but technology doesn't stand still. While states were trying to figure out digital products, businesses moved on to the cloud. The problem now is that states are issuing guidance on an ad hoc basis addressing specific situations and trying to fit a modern concept into antiquated rules and statutes.

At a recent conference in Washington, D.C., practitioners highlighted many of the regulatory changes that have occurred in the past year. Interestingly, of nine states that have recently issued administrative guidance on the taxability of cloud computing services, only two have found the services taxable. The remaining seven have determined cloud computing is not taxable.

Other states will continue to debate the taxation of cloud computing, but it's not going to be an easy discussion. Cloud computing is borderless, so location is irrelevant -- it doesn’t matter that a company is in Nevada, a software user in New York, and the servers on which the company runs its application in Texas. Yet sales and use taxation is predicated on location. Expecting the two to play nicely together may be a pipe dream. But until reality sets in, taxpayers must continue to monitor the ways in which states try to shoehorn cloud computing into existing laws.

Read Comments (2)

Eugene Patrick DevanySep 26, 2014

The location problem is one reason every developed economy (outside of the
U.S.) uses a VAT.

charles chongoSep 26, 2014

Let's go a step further--get rid of all State and Local level taxes and
implement a Federal VAT...and share revenues with the states. State tax is
incredibly difficult to manage and sales tax is an extremely poor vehicle for
raising revenue.

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