Questions over cloud computing tax remain murky

Tom Kavet, economist for the Vermont Legislature, speaks at an Emergency Board meeting on July 20, 2012. Photo by Taylor Dobbs

Members of a special study committee don’t appear much closer to consensus on a tax on cloud computing, even though they must make a recommendation to the Legislature in January.

A moratorium on cloud computing taxes is set to expire in July 2013. Cloud computing includes digital software accessed via a remote network of computers, rather than digital services accessed on site.

Rep. Janet Ancel, D-Calais, says it’s unclear whether the committee will greenlight a cloud computing tax. Ancel said the cloud computing tax isn’t the same thing as taxing a service, which could open the door to a larger question of expanding the state’s sales and use tax from goods to services.

At the Statehouse on Monday, members of the Sales and Use Tax Committee, which is made up of professors, lawmakers, an economist and a lobbyist, heard testimony on the technical variations in cloud computing tax policy explored by other states, particularly Washington.

Tom Torti, Lake Champlain Regional Chamber of Commerce president and a committee member, reminded lawmakers that the fundamental question of imposing a tax remained open.

“I was just saying, look: This committee is supposed to decide ‘if’, not ‘how’. We may get to ‘how’ someday, but I just want ‘if’ to be on the table,” Torti said after the hearing.

Lobbyist Chris Rice, of MacLean, Meehan, & Rice, said that while it’s important to consider technical questions, like which states should tax the buyer or sellers, or whether the product is legally a software, a service, or both, the more fundamental question is up in the air.

“We’re talking about all the mechanics of how to do this, but we haven’t yet talked about whether we should do it or not,” said Rice. “For me watching it, that’s the critical issue. … Is it something from a policy perspective that we want to do? I don’t know if they have fully vetted the issue yet.”

Rice said his firm doesn’t support or oppose a cloud computing tax at this point.

“It does have broad implications, in a lot of areas,” Rice said. “Yes, it’s a specific tax question, but it begins to blur the distinction between goods and services. That’s a really big question that this Legislature has been talking about for a while.”

Gov. Peter Shumlin couldn’t be reached, but he told VTDigger through a spokesman during the election that he opposed taxing the cloud. House Speaker Shap Smith didn’t immediately return a request for comment.

The Legislature’s economist Tom Kavet said the current moratorium on cloud computing tax, and a refund from the state to those who’d been retroactively taxed via an administrative tax department bulletin, hadn’t benefited the software industry much, according to initial data from the Tax Department.

Kavet told VTDigger a cloud computing tax exemption would not be beneficial. “I just think that if you want to help the software industry, this isn’t the way to help the software industry,” Kavet said. The state’s efforts to provide universal broadband access is a better way to boost the local technology industry, he said.

“They [the state] have to raise taxes somewhere else,” he said. “It’s just shifting the tax burden. It’s not really doing anything to help the software industry per se.”

Kavet said that an exemption would help purchasers of cloud computing products, mostly large companies according to his review, but would cost the state in lost revenues, which could amount to a few million dollars annually. In his view, products potentially subject to cloud computing tax were previously taxed, and should remain taxed, as evolving delivery and technology platforms don’t make a relevant difference.

KSE Partners lobbyist Scott Mackey told the committee that some of his clients, who are large multi-state wireless providers, want clarity on cloud tax regulations. His clients he said need consistent policies that avoid taxing businesses more than once and that don’t discriminate between cloud and non-cloud digital products.

According to testimony from Luke Martland, Legislative Council director, 21 states already tax cloud computing, while 18 with sales taxes don’t. In six states that impose a sales tax, it’s unclear whether cloud computing is taxable.

Torti said the importance of clarity was the key takeaway from Monday’s meeting: “The message is that everybody – whether the Legislature, the Tax Department, the business community – whatever decision we make, we have to make it crystal clear what is going to be taxed, and what isn’t going to be taxed.”