If your enterprise has adopted cloud services within the last year or so, you are probably aware of the growing concern about taxation of SaaS (software-as-a-service). Your company may even be among those unfortunate enough to be served with a hefty tax bill -- after fighting for substantial budget funds to save costs with clouds.
The problem, in a nutshell, is that in the US, neither cloud service users nor providers have been prepared for the state sales taxes they've been hit with as a result of aggressive action by state governments. Cassimir Medford, editor in chief of SaaS in the Enterprise, summarized the situation in a blog last week:
The economic downturn, which ironically coincided with the SaaS growth spurt, has helped make the technology the object of the tax departments of cash-starved states. Most states are keen to enhance their tax bases by targeting a fast-growing service such as SaaS.
Questions abound, however, about how states should be taxing cloud providers and their customers. Is a cloud service an instance of software subject to sales tax? Where? What about services based on multiple servers located out of state? And do public cloud services differ from private ones for tax purposes?
So far, there's no consistency in the way states are taxing cloud services. Many states have relied on so-called "private letter rulings" containing specific guidance from the IRS. And as Cassimir Medford noted in a blog yesterday, at least one state -- Vermont -- is veering back and forth on the SaaS taxation issue.
The issue of cloud taxation has drawn corporate tax consultants out of the woodwork with offers of help. Firms like Grant Thornton International and PricewaterhouseCoopers International have published extensive papers and brochures on the topic. (Rest assured: Reading these will instill a sense of urgency in any enterprise cloud customer or provider who hasn't considered the issue before.)
As questions proliferate, one thing is clear: The issue of cloud taxation won't be going away. "This Pandora's box will remain open," stated Medford. And in a Forbes blog last week, Erika Morphy had this to say:
In short, whether they have said so publicly or not, collecting sales and use taxes from cloud computing customers via their providers has become a topic of interest for state tax officials. Many states have been studying the issue for at least a year and it won’t be long before they start to collect.
Morphy's blog notes that the issue of cloud taxation mimics the kerfuffle that erupted last year around the taxation of e-commerce sales. And it could bring about a few unhappy outcomes in terms of higher prices and more complicated ROI for IT departments already struggling to justify cloud purchases.
I suggest taxing the cloud and offering a rebate for the the reduction the carbon footprint. You see this way everyone is both unhappy and happy at the same time.
As with IP law, the way we think about tax law remains pre-digital. So much of it is based on location, but the services we purchase are becoming ever more remote. I am thinking of the still not finally resolved Amazon issue: states wanting to charge sales tax on Amazon purchases because it's one of the biggest vendors in the state - even though it's not in the state.
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