Shumlin administration proposes to make cloud computing tax exemption permanent

The Shumlin administration’s miscellaneous tax proposal — a mix of substantive and technical tax policy changes — would remove a sales tax on cloud computing use by businesses. The draft legislation also fleshes out the adminstration’s much-discussed plans to tax break-open tickets and cut the state’s earned income tax credit.

Last year, the Shumlin administration backed a retroactive cloud computing moratorium that reimbursed businesses for about $2 million in taxes that had already been collected. This time, the proposal would make the exemption permanent.

The dense 36-page bill includes a broad provision (buried in the fine print on page 34) suggesting that an exemption on cloud computing be added to the state’s 49 other sales tax exceptions.

House Ways and Means chair Janet Ancel, D-Calais, says it’s not prudent for the state to extend a permanent exemption to cloud-based software companies at a time when tax revenues are tight.

“There really needs to be a compelling reason to create a new exemption,” Ancel said. “I haven’t been convinced that a compelling reason is there.”

The Education Fund would suffer as a result of additional exemptions to the sales tax, she said, 35 percent of which is funneled toward state’s K-12 public education programs.

Tom Kavet, the legislature’s economist, has estimated the $2 million the state opted not to collect last year would likely grow in future years as the economy continues shifts toward more online services like cloud computing.

A study committee voted 4-3 late last year to recommend the permanent exemption proposal.

Tax commissioner Mary Peterson said that the Shumlin administration is pushing for a cloud computing tax exemption for two reasons.

“From the governor’s perspective, it’s a matter of economic development,” Peterson said. “This is a new area we want to be encouraging Vermont businesses in. And from my perspective, just in terms of tax administration, it’s such a new area that is constantly evolving. It’s really difficult to adminster a tax on something that’s evolving so rapidly.”

The proposal promises to revive a controversy from last year, after businesses first received, and then successfully suspended, a retroactive tax imposed by an administrative tax bulletin from the tax department.

In Ancel’s view, the administration has exaggerated the impact of an exemption on the retention and attraction of tech businesses in Vermont. “This exemption exempts the consumers of cloud computing, not the developers,” she said. “It’s kind of a stretch to say that the exemption will make or break a business in this state.”

A majority of the Ways and Means committee has to approve the miscellaneous tax plan before it can move forward. The committee will likely divide the technical sections of the bill from the more substantive provisions of the comprehensive proposal into two bills, as it has done in previous years.

Not much testimony is scheduled on the cloud computing issue, since all but one committee member heard extensive testimony about cloud computing last year when the issue ignited the Statehouse.

Other notable items in the administration’s plan include specific wording on break-open tax tickets, which may raise anywhere from $6.5 million to $17 million, and a reduction of the state’s EITC from 32 percent to 11 percent of its federal counterpart.

The sale of individual break-open tickets would be tracked under this proposal, rather than the number of boxes, under this proposal. Currently there’s no data on how many single tickets are sold: Critics say the tax won’t raise the promised $17 million, or roughly 10 percent of sales, because Vermonters don’t buy enough tickets.

The General, Housing and Military Affairs committee will tackle the initial work on break-open tickets, Ancel said, and House Human Services will handle the EITC issue, before Ways and Means takes up the proposals again.

Follow Nat on Twitter @natrudy

Comments

  1. “This exemption exempts the consumers of cloud computing, not the developers. It’s kind of a stretch to say that the exemption will make or break a business in this state.” – Janet Ancel

    Indeed, the subsidy seems to encourage VT businesses with IT expenses to send that money out of state.

    I will check the VT Digger archives for some dirt on last year’s “extensive testimony,” I am definitely interested in learning more about the logic and politics behind this.

  2. Ron Pulcer :

    If the cloud-based software services get an exemption (permanent), then that puts other downloadable software retailers / developers at a disadvantage.

    This sounds just like the unfair playing field of Amazon.com versus your local downtown bookstore. Why is the governor picking winners and losers within the software products / services industry?

    http://vtdigger.org/2011/02/07/tax-reform-part-3-why-the-%E2%80%9Camazon-tax%E2%80%9D-is-a-no-brainer/

    Right now, if I buy a software package via download and install it on my computer, I am supposed to pay a USE TAX.

    But if I instead use a web-based software service (my data is stored in the “cloud” instead of my PC), then I would not have to pay any tax or fee. Actually, right now, it doesn’t appear that there is any tax or fee, since cloud-based services are sort of new (actually, the name is new, but not the concept), and the Legislature has not dealt with this yet.

    And, if the cloud-based service company puts there servers in the Cayman Islands, they won’t have to pay any taxes either!!!

    Either drop the USE tax for downloadable software or don’t give any exemption to cloud-based services.

    As an IT worker for 30 years, there is no such thing as a “cloud”. It’s just a remote server or data center with file storage space, databases and applications (just like mainframe data centers decades ago). Yet another techno buzzword … there is really nothing new under the sun, and that includes IT!

    Amazon.com is an online retailer, but it is also like a cloud based service: they have databases on books (and other items for sale) and they also have your purchase data, contact data, credit card data on file. They provide a software service that allows you to find and purchase books.

    If Vermont wanted to tax Amazon.com, then why give an exemption to the other online services.

  3. Ross Nizlek :

    What I’m interested in is how do other states handle this issue? If the majority of states don’t tax these services, then doing so puts us at an economic disadvantage. However is most states do tax these services, then I think we may have cause to do so.

    It’s an interesting issue as typically cloud services cost more than traditional licensing, but they ultimately reduce total cost by reducing the amount of labor they require to implement and maintain, as well as reducing hardware costs. Labor, of course, isn’t subject to use tax, whereas the software licensing these service displace is. Maybe a middle ground would be to implement a 50% tax credit off the current use tax rates for these services.

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