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Vermont Cloud Computing Tax Called into Question

  • Apr 2, 2014 | Gail Cole

 The fate of Vermont's cloud computing tax is foggy.

After years of wrangling over the taxation of cloud computing services, Vermont ended a temporary moratorium and began imposing a tax on the sale of certain cloud computing services on July 1, 2013. Currently, sales and use tax applies to prewritten software “bought or leased for the customer’s use on a disk, as a download, or accessed on a remote server.” Transactions involving only “custom software, a personal service, or professional services” are not subject to the tax.

Products that are only available “by remote access” may be subject to sales and use tax, or they may not. The Vermont Department of Taxation advises sellers and buyers of such products to read its fact sheet on the subject, particularly page 2.

Yet the issue is far from settled. Recently, a proposal to exempt cloud computing services from sales and use was put forth by Vermont lawmakers. Section 15 on page 11 of Senate Bill 220 is titled: “Cloud Tax: Sales Tax on Prewritten Software Does Not Apply to Remotely Accessed Software.” It explains:

“The imposition of sales and use tax on prewritten computer software by 32 V.S.A. chapter 233 shall not apply to charges for remotely accessed software made after December 31, 2006.”

It also clarifies that the state’s sales and use tax on specified digital products “pursuant to 32 V.S.A.  § 9771(8)” would not be changed by this section.

Storm clouds

Vermont is not the only state to struggle with the taxation of cloud computing services. Massachusetts, for example, enacted a tax on cloud computing services last summer, only to repeal it 6 weeks later. Many states are still grappling with how sales tax should be applied to digital goods and cloud computing services: what should be taxed and where to apply the tax (a sourcing issue). In other words, there is still a good deal of uncertainty surrounding the topic. It’s kind of like the Wild West.

It’s been hard for state tax laws to keep pace with technology and as a result, policy has sometimes been made on the fly. When states lack clear legislation, state departments of revenue often end up determining how states will tax cloud computing services through proclamation. However, lawmakers are educating themselves on cloud computing and are therefore better equipped to create legislation about it. In 2013, 12 bills dealing with cloud computing tax issues were introduced; state tax attorney and expert Stephen Kranz predicts 2014 will be similar.

As they learn how cloud computing taxes impact businesses (hint: businesses don’t like them), more and more legislators are seeking to exempt those services from sales tax. Massachusetts quickly repealed its cloud computing tax after businesses threatened to leave the state. Michigan lawmakers are considering exempting cloud computing services from sales tax, “to assist the businesses that rely on cloud computing services, as well as make the State attractive to the companies that provide them….”

And Vermont? Vermont needs to sort out its priorities. Is it more important to exempt cloud computing services from sales tax, thereby encouraging certain businesses to stay or set up shop in Vermont? Or is it better to keep the tax and the revenue it generates?

Be ready for whatever Vermont (or Michigan, or …) decides. Switch to an automated sales tax solution.

photo credit: [ Ben ] 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.