Can Taxes Reach the Cloud?

Grazed from Business2Community. Author: Kirill Bensonoff.

There’s usually nothing very complicated about paying sales taxes. You go to the store to buy an Xbox game and, at least in most states, you pay a few extra bucks.

When you start talking about the cloud, things get more complicated very quickly. After all, the whole point of cloud computing is that your software and storage space is remote—often in a different state or even a different country. Maybe your data is duplicated in two different places with wholly different tax laws.

The issue is so complicated, and so new, that most states don’t have clear rules yet about how to levy taxes in the cloud…

A similar issue has already come up with online retailers like Amazon. A number of states, under pressure from local businesses, have moved to force e-commerce companies to apply their local taxes when they ship stuff to customers. Laws generally require retailers to collect taxes in any state where they have a physical presence, so Amazon has collected taxes from residents of Washington, where it’s based, as well as other states where it has distribution centers, for years. More recently, the company has cut deals with a handful of other states to make its shipments taxable, but in most parts of the country, residents still get their Amazon boxes tax free.

With cloud products, things are even fuzzier. Not only is it unclear whether a cloud provider with no physical presence in a state can be subject to that state’s taxes, but the products cloud companies offer aren’t necessarily taxable to begin with. Generally, sales taxes are more likely to apply to goods than services. And, while a CD of the latest edition of Microsoft Office is clearly a good, cloud-based software as a service has “service” right in the name.

The latest state to try to hash out the issues and send its tax man into the cloud is Massachusetts. In a recent public letter, the Bay State claims that its 6.25 percent tax applies to software downloaded from a cloud server, or software that a customer accesses on a cloud provider’s machine. If a firm runs its own software in the cloud, on the other hand, there’s no tax.

Other states have addressed the question in different ways. New York says that using software remotely constitutes “constructive possession” of property, which means it can be taxed. Pennsylvania only requires taxes if the server where the data is stored is in the state.

It’s still too early to know exactly how taxes in the cloud will shake out, but, with the boxed software from a store looking more and more like an artifact of an earlier era, it’s certainly worth watching.