The Cloud (Tax) Platform

Grazed from AccountingToday. Author: Jim Ericson.

On the eve of an election in a year full of rancor over whether taxation belongs at the federal, state or local level, corporate IT buyers are already getting a taste of how regional levies could affect their current costs and future strategies. The new wrinkle amid growing demand for departmental and line of business technology comes in state taxation of cloud computing, services that move the delivery and maintenance of business tools into the hands of third-party providers.

“There is a lack of uniformity nationwide addressing the taxation of traditional versus cloud services and it’s causing lots of headaches,” says Carolynn Iafrate Kranz, a partner, Kranz & Associates, PLLC, a boutique law firm specializing in state and local tax consulting…

The linchpin in the tax issue is whether cloud products constitutes a transfer of ownership. Advisers say existing laws are vague and vary greatly. States like Oregon or Delaware that don’t levy retail taxes avoid the problem, but only locally. Customers buying consumer goods on the Internet, for example, already see an irregular mix of taxed and non-taxed transactions for items bought across state lines.

The impact is worse for companies that are moving significant dollars to service spending but don’t foresee a tax bill. Local sales taxation of every subscriber and upgrade to a business’s hosted email service, for example, could raise costs an additional 6 to 10 percent, an unwelcome surprise at the scale being addressed. Though popular SaaS products such as salesforce.com, Workday and Office 365 are more economical than purchasing licenses and have lower carrying costs, across large user bases the subscription model can add a substantial tax burden…

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