US States Taxing the Cloud!

Whilst the cloud has proven to cut costs for many organizations via the use of managed hosting and the virtualisation of business applications etc., it has, in some instances been the subject of increased taxation. Idaho for instance is one of several states (including New York and Texas) now taxing cloud services – something of a surprise since Idaho doesn’t tax most services. From accountancy through to repairs, there is currently an exemption from Idaho’s 6% sales tax.

This is not the first instance though: 2009 saw the first taxation of the cloud with Arizona, Indiana, New York, Washington and Texas eagerly seizing the opportunity to take a chunk out of this fast growing industry. Other states such as Nebraska and Kansas have opted out of such taxation, as long as buyers didn’t use downloaded software.

According to Daniel Dixon, a senior tax attorney, so many states passing legislation so quickly over such a matter is quite a feat. What makes Idaho special in this instance, is that its tax code defines any software as a taxable tangible product, regardless of the way in which the customer acquires or uses it.

SAAS is one of the fastest growing sectors of IT, with expected revenues in excess of£10 billion in 2013. Now, software which was once delivered in the form of a CD for a one-off price and installed on a computer is now being delivered online and charged as a subscription.

The problem with the new system, according to owner of Tsheets Inc. in Idaho Matt Rissel, is that Idaho is not only beginning to charge tax, but claiming it retrospectively. The taxes are not only being charged against cloud providers but also the companies who use cloud services. As such, there are a range of companies affected from grocers through to microchip manufacturers such as Micron Technology Inc. Many of these businesses are lobbying the state to reverse the cloud tax, pointing out that the ability for a business to absorb tax is limited and costs would eventually be transferred onto the consumer.

Until now, when Amazon for instance was collecting sales tax on goods shipped within the US, it only had to do so if it had a physical presence in that state. Now that cloud providers are no longer exempt however in certain states, this has changed.

This is an age where the quantifying of IT goods is becoming ever more difficult and where virtual services are becoming ever more prevalent and thus less tangible. We should not be surprised therefore, if tax departments outside of the US will start to devise new ways of channelling revenue streams away from such a booming industry. Should the UK government such a manoeuvre, it should remain cautious, as pushing costs onto customers through increased corporation tax is not conducive to small-business growth, which are so crucial to the economic future of Britain.

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