Many states and a few cities are looking to tax cloud computing transactions, especially since there are no federal laws that directly impact these issues.
Cloud-based products and services delivered over the Internet “test the limits of existing sales tax rules,” said Mary T. Benton, partner in Alston & Bird’s State & Local Tax Group.
“Most people are comfortable that there is a rational basis to subject digital goods to tax, particularly when those items are taxable when purchased in tangible form,” said Benton.
“However, when you move into the services that are provided through the cloud, it is not as straightforward,” she cautioned. “At its core, whether cloud transactions are subject to tax, is a policy question that should be decided by state legislatures. While many states have tackled the taxation of digital goods, very few have thoughtfully addressed whether to subject software as a service to taxation. This absence of direction from state general assemblies means that the taxation of these cloud transactions is being addressed individually by each state’s taxing agency. However, the sales and use tax statutes, the constructs of which were developed decades ago, do not easily translate to this new technology. Applying these 20th century laws to 21st century technology is the epitome of trying to fit a square peg into a round hole.”
She also explained that sales tax is generally imposed “on the sale of tangible personal property and specifically enumerates services…To subject cloud transactions to taxation, they must come within one of the taxable categories.”
There is also an issue for businesses operating in multiple states.
“A cloud transaction that is not taxable in one state in which you do business may be taxable in another for one reason and taxable in a third state for a different reason. And even in states that don’t subject cloud transactions to tax, the bases for that conclusion may vary. Thus, there are many complexities in trying to determine how these cloud transactions will be treated for tax purposes and many relevant laws, cases, rulings and policies that must be analyzed to make the determination,” Benton said.