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How to Tax a Cloud?

  • Nov 20, 2012 | Gail Cole

The idea of taxing a cloud sounds a bit like it comes from a Kafka novel, but it's been a hot topic of discussion among tax experts, state departments of revenue, and state legislators.

Cloud computing eludes easy categorization. Is it a service? A type of storage? Data processing? Software? Inquiring minds want to know. Why? Because "the 20th-century rules of taxation no longer apply." Individual states don't want sales tax revenue to evaporate in the clouds. Business owners want to keep current on how cloud computing services are taxed in different states.

Tax experts addressed the topic at two tax conferences this month. At the 28th Annual High Tech Tax Institute in Palo Alto, a breakout session focused on "Indirect Taxes and Emerging Industries: An examination of common structures for cloud computing… . How does sales tax and VAT apply to such transactions, what guidance has been issued and how to deal with uncertainty." At the National Tax Association's 105th Annual Conference on Taxation, John Swain from the University of Arizona presented a paper on "State and Local Taxation of Cloud Computing: A Normative Approach."

Individual states have been trying to determine how to tax the cloud since it was created. For example:

  • The Washington State Department of Revenue clarified how taxes apply to the cloud in July 2009.
  • The Massachusetts Department of Revenue issued a Letter-Ruling in July that delineates which cloud computing products are subject to the state sales tax and which are not.
  • Vermont currently has a "moratorium on cloud computing taxes" and a special committee looking into the matter. The moratorium, which runs through July 2013, was proposed to allow more time to consider the matter. A recommendation must be presented to the Legislature in January.

One thing is certain, just as the cloud is forcing states to rework tax law, cloud technology has the ability to keep up with this evolving legislation. In fact, a cloud sales tax solution can relieve businesses of the headache that comes from trying to keep up with how states are taxing cloud services.

Learn more about how a cloud sales tax solution can save your business time and money by automatically keeping up with changing legislation to give you accurate and automated sales tax calculations.

photo credit: Jason A. Samfield via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.