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Navigating State Taxes in the Cloud


With the pervasiveness of cloud computing, you may have witnessed a state tax assessor acting on an extreme tax position in an effort to apply dated tax concepts to a technological new world. Tax treatment varies from state to state, and some states' positions make logical sense, while others are difficult to fathom. Although the majority of states still do not impose sales and use taxes on services, some have specific carve-outs for data processing and information services that could deem cloud computing taxable. Purchasers of cloud services can be in for the biggest surprise if a state deems the services subject to use tax where the seller was not required to withhold the sales tax. Taxand US discusses the possible value of federal tax legislation being considered for Cloud Computing to bring harmony across different US States.

According to the National Institute of Standards and Technology (NIST), cloud services maintain five essential characteristics:

1. On-demand self-service: Clients can adjust their computing capabilities (server time, network storage, etc.) without human interaction with the service provider
2. Broad network access: The services are accessed over networks through a client's own platform (e.g Internet browser)
3. Resource pooling: Computing resources are pooled to serve multiple clients without their control or knowledge; specific resources are not dedicated to individual clients
4. Rapid elasticity: Cloud services can seamlessly expand or contract to meet the client's demands
5. Measured service: Cloud systems resources are managed automatically, with transparency between the client and provider

A handful of states have ruled that cloud services fall within taxable categories such as data processing, information services or communication services. Connecticut taxes data-processing services and software transferred electronically at the data-processing rate. Hawaii considers all services taxable, therefore including cloud services. The definition of data-processing services is fairly broad and likely to include cloud services. Other states treating the sale of cloud services as taxable services include Ohio, South Carolina (as communications services), South Dakota, Texas and West Virginia.

Taxand US provides greater details around the issue of cloud computing taxing in the different US States

Taxand's Take

Even though federal legislation requires online sellers to collect sales tax regardless of nexus, this has more momentum now than it has ever before, and no one can predict when or if such legislation will be enacted. Until then, navigating state tax exposures of cloud services requires a steady hand at the helm. Providers and consumers alike must look ahead to avoid potential state tax pitfalls, as well as look back to see what potential issues have been left in their wake. States are reaching farther for tax revenue than ever before, and they will not likely stop at the clouds.

Your Taxand contact for further queries is:
Tony Fuller
T. +1 415 490 2256

Taxand's Take Author