Thursday, May 2, 2013

Not So Simple–Recent Developments in Taxing the Cloud

We write frequently about developments surrounding federal tax legislation such as the Marketplace Fairness Act, which is up for a vote before the Senate on May 6. One of the major issues critics have with the Act is that despite proponents’ claims, it fails to provide for real simplification of state and local tax regimes, such as a uniform tax base among the states. Without a uniform tax base, compliance is incredibly complex for even the savviest of retailers.  The problem is much worse with respect to computing services and digital products delivered over the Internet.

For instance, cloud computing has some of the murkiest tax rules – some states have issued clear statements regarding taxability of IaaS, SaaS, or PaaS, but few have addressed all types of cloud services and many have failed to address the issue at all. Retailers are left guessing at the proper tax treatment of their sales and hoping their interpretation of tax rules is the correct one. That tax rules are ever-changing does not help matters. A uniform tax base would lessen this problem. Instead, retailers must monitor developments in myriad jurisdictions to find some clarity, although tax treatment still varies from state to state.

Idaho, for instance, recently exempted SaaS from sales and use tax by amending its statute to exclude “software accessed over the internet or through wireless media” from the definition of tangible personal property. See Idaho Code § 63-3616(b). Previously, the statute included as taxable tangible personal property any non-custom computer program “regardless of the method by which the title, possession or right to use the software is transferred.” The Idaho State Tax Commission interpreted this language as imposing tax on SaaS, although it noted in its opinion that “Due to the complexity of the business models, it is not possible to provide an all inclusive list of taxable sales transactions or taxable uses. As this technology advances, it may introduce more rather than less certainty.” Cloud Computing and Related Software Sales and Use Tax Issues (10/22/2012) (emphasis added). Even when providing some now-moot clarity to the taxability of SaaS, the state had to admit that its interpretations could not be considered definitive or final.

Meanwhile, in Massachusetts, Governor Patrick’s proposed FY2014 budget would impose tax on certain computer and data processing services, including “provision of access to software or the storage of data on the seller’s or a third party’s server.” It is unclear whether this provision will pass, but as is common, the language is open to interpretation. (Note that Massachusetts already imposes tax on SaaS. See 830 CMR § 64H.1.3(14)(a).) True simplification and a uniform tax base would alleviate much of the difficulty retailers have in complying with ever changing tax rules.

As always, with tax bases varying among the states and being subject to constant revision, we advise businesses to consult with their tax professionals early and often.

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