Taxing the Cloud

Some US states are seeking to create a special cloud computing tax; what this means for individuals and businesses

For a long time, the general approach has been to avoid imposing sales tax on internet-based goods and services. This is especially true when sales and shipping are being processed from out-of-state and local governments aren’t really involved in a transaction in any way. Well, as we’ve seen recently, there’s been a bit of a push by lawmakers to tax the sale of all products and services sold through the net. Ultimately it would seem, the decision to impose such a tax is being left in the hands of state governments, with only Virginia and Maryland pushing for immediate action. Maryland Governor Martin O’Malley actually wants to extent the tax to extend the tax to include digital products as well. cloud computing tax

Massachusetts policy makers have been directly addressing cloud computing and the moral ambiguity surrounding it. Basically, what they’ve been able to determine is that that “pure cloud computing” isn’t taxable and that any kind of product/service requiring receipt of physical software of download of it, is taxable. So, what is “pure cloud computing”, you ask?  When you have a service that runs by means of complete virtualization (all hardware, software and “action” takes place remotely), then we are talking about “pure cloud computing”. Often times an individual or business employing a pure cloud will only need little more than a bare-bones system consisting of little more than a browser OS and a monitor. This type of cloud computing is nearly always a service that’s delivered from out-of-state as well, making it tax exempt in two distinct ways. SaaS vendors (which are either mailing out software or having customers download packages to access their services) on the other hand, may bear the brunt of the tax burden.

The questions of the day are: will the taxation of the cloud set the precedent for additional future cloud tariffs (in the long-term) and will this have an effect on the types of cloud services people / businesses flock to (in the near -term)?

It’s fairly safe to say that the reason why some state governments are so eager to tax the cloud is because they see its popularity rapidly increasing and the immense value it brings. Furthermore, the stellar sales being reported for 2011 have most likely had a great deal to do with this initiative as well. In other words, given that many state governments are hungry for cash, setting a tax precedent for a potentially lucrative area like cloud computing might be seen as way to boost annual budgets without having to actually do much of anything.

The problem is that this might very well open the door for taxing all non-tangible items and computing services all across the board, which would include every single form of cloud computing out there. As you are no doubt already aware, that’s how these things usually work – a few initiatives are passed which grants the power to tax a new type of product or service and shortly thereafter, taxes are rolled out for anything that’s similar or related. Likewise, once these types of taxes are in place, they’re often incrementally raised without much effort – just refer to Tobacco and Alcohol {I’m not defending these institutions or the harmful products they sell; only demonstrating how certain products tend to be taxed}. Then you also have to realize that if too many state governments begin taxing the cloud at will, it will have a direct effect on the growth of the entire industry. After all, we’re talking about collecting taxes on non-tangible goods which are being provided by businesses located out of state. As far as in-state commerce is concerned, perhaps there is justification in certain circumstances, but we’re really talking about “cross-border” precedents here.  

Taxes levied against certain types of cloud providers will also have a direct effect on the way consumers approach cloud computing as a whole. This isn’t rocket science, if one area of cloud computing is taxed while another is not, those being forced to assume these costs will have to overcome additional obstacles. Moreover, if you’re a SaaS vendor, you’ll likely have to raise your prices in order to offset tax-based losses. The end result of these tax mandates will be that prices on certain types of cloud offerings will spike, which will ultimately steer users toward the cheaper, non-taxed offerings. The question is, once lawmakers realize that people are opting for non-taxed cloud services will they then decide to take further steps?

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