Taxing the Cloud

In the last several years, at least within Internet circles, everyone has been talking about the cloud. Ask ten different people and you’ll get ten different answers, but the truth is, no one really knows what or where the cloud is. That’s okay. Lack of concrete definitions and clarity never stopped government from taxing something or in this case nothing.

As best can be explained, the cloud is an Internet-based system of data transfer and storage. Information contained within the cloud isn’t in anyone’s computer, but is held somewhere out there in cyberspace. Because there is no material aspect to the cloud, it can’t be taxed outright, and the global networks supporting it make it borderless. Since the exact location of the cloud can’t be pinpointed, some states are looking to generate revenue by taxing the end users depending on their geographical location. This, however, introduces a new set of problems. If two cloud users, located in different states, are working together on the same project, which state tax law applies? If a state taxes at the point of use, what if services are free at the point of use? If taxes are based on the location of the servers or the offices of the cloud service provider, what’s to stop that company from moving to a lower tax state? How will companies with offices in several states avoid being taxed in two locations simultaneously when states apply different sourcing rules for use and sales tax purposes?

These were the big questions recently at the Institute for Professionals in Taxation’s Sales Tax Symposium in Washington D.C. Some states have already published administrative advice on the taxability of the cloud, while others have committed to a no-tax policy. Some states, including Ohio and Utah, have already determined that some cloud computing services are taxable. For more information, visit Don’t Mess with Taxes.