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Idaho Considers Taxing Cloud Services

  • Jan 15, 2013 | Gail Cole

 Idaho Tax Commission Considers Taxing Cloud Computing Services.

Earlier this century, states spent a good deal of energy determining how to tax digital goods such as e-books, movies, and music; questions about these issue still linger. Yet, today, many states are focusing on how to tax a cloud and cloud computing services. At issue is how to balance taxation with economic development.

Idaho made news late last week because of reactions to "a flurry of audits on Idaho technology businesses" by the Idaho Tax Commission. The Idaho Statesman reports that entrepreneurs in the state are up in arms. They worry that impacted businesses will move out of state rather than stay and pay taxes on their services. Neighboring Montana and Oregon do not have sales tax.

Idaho has taxed the sale of tangible personal property since 1965, and it has included software in that category since 1986. Software purchased at a store (on a DVD or CD) and software downloaded from the internet to a home computer are considered taxable transactions in Idaho. But cloud computing is different.

What is cloud computing?

"Entrepreneurs say cloud-computing is more like a professional selling time and advice than it is a business selling taxable software or hardware." They argue that the ownership of tangible goods is not being transferred. Instead, according to one cloud computing company's CEO, customers "use the software and data that sits on my server."

Alternatively, "analysts at the Idaho Tax Commission view it as merely an evolutionary step in how modern goods are delivered." The commission insists it "tries to enforce the law fairly and equitably." Idaho attorney Brad Frazer says "the Idaho Sales Tax Act arguably permits this taxing activity but it's gray. It's unclear."

The Idaho Technology Council is seeking clarity - and "a clarifying amendment." They have voiced their concerns to Governor Otter himself, and drafted a position paper that asks "the Tax Commission and state legislators to work with the group on" this critical matter.

Idaho is not the only state to confront this issue. Last year in Vermont, a tax panel voted against taxing cloud services in order to keep software companies in the state. Massachusetts has issued a letter ruling on the subject explaining how some cloud services are subject to taxation and some are not. A discussion about cloud computing and taxation is under way in Washington state

The bottom line? "Most cloud computing offerings do not fit neatly into traditional state tax categories."

Does your business work in the cloud? Maybe it's time to let someone else think about sales tax law and cloud computing.

photo credit: kevin dooley via photopin cc

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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.