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
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.

What is cloud computing?

To the consumer (i.e., you and me), cloud computing means that instead of purchasing software on disks and file downloads, one instead subscribes to a service, like Microsoft Office 365, TurboTax Online, or Apple’s iCloud, where application programs run at remote data centers, and the user accesses programs through a web browser or mobile applications (e.g., Instagram or Twitter). Payment can be one time, on a monthly basis, or maybe even free like Facebook or Gmail. In the latter case the service is usually accompanied by consumer advertisements and/or data collection, which can be sold to other parties.

To organizations (e.g., dealer.com and mywebgrocer.com), cloud computing means that instead of purchasing and maintaining racks of computers, organizations instead subscribe to a remote data center (e.g., Google, Amazon, Microsoft, or IBM) that hosts their applications and charges the organization for a particular level of service (DaaS, IaaS, PaaS, etc.) and the resources (CPU hours, disk space, and network usage) that their applications consume. In this way large, one-time capital expenses are traded for more modest operating costs that only grow as the organization becomes more successful.

~From UVM professor Robert Snapp

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.”

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Nat Rudarakanchana

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  • Please, please, please stop referring to this as a tax on “cloud computing.” What is being described is not about cloud computing. It is about taxing software purchased by downloading it from a reseller over the Internet. In my mind, this is not much different from taxing software purchased by carrying a CD-ROM through a retailer’s checkout register.

    In a separate forum, at another time, our legislators may want to talk about taxing software as a service (Saas). But that will require that they consider taxing all other services (plumbers, lawyers, electricians, auto repairmen, etc.). They will also need to solve a lot of other thorny problems that have, so far, eluded the legislators in other stats.

    In the meantime, please rename this initiative so its title accurately reflects its intent:

    A tax on downloaded software.

    • Actually, they were (and are in the future) trying to tax SaaS applications with this tax. It is a matter of how the tax dept. was, and may in the future, interpret the law. From http://stopthecloudtax.org/cloud-tax/ :
      “The Tax Department has applied this to cover not only ‘downloads’ of software from remote servers, but also mere access to software on remote servers.”

      And you are absolutely right, if they do tax SaaS applications, it will require them to consider taxing all other services. They can’t just single out SaaS. This will open up a huge can of worms.

  • Tim Cansfield

    When all you can do is spend, you have to find more money wherever you can.

  • George Hall

    “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.”

    How about the idea of speding less! Vermont, home of the free and the overtaxed.