Tax study committee recommends exemption for cloud computing

Rep. Janet Ancel, D-Washington. VTD/Josh Larkin
Rep. Janet Ancel, D-Washington, chair of House Ways and Means. VTD File Photo/Josh Larkin

State lawmakers, tax officials, and representatives of the business and software communities voted 4-3 on Monday to exempt businesses from a tax on cloud computing services in a set of recommendations to the Legislature.

The members of the Sales and Use Tax Study Committee who are in favor of a tax on remotely accessed software argued that the state would lose $2 million in potential tax revenue in the first year, and untold millions more in future years, as businesses expanded and scrambled to exploit a tax exemption.

Those against the tax on cloud computing said the economic benefits of an exemption would outweigh lost tax revenue, by keeping businesses, jobs, and especially software companies in the state.

The legal and tax definition of cloud computing is disputed and complex, but the term broadly means computing services accessed off site, in a location distinct from where underlying physical infrastructure is located.

Tax Commissioner Mary Peterson, a member of the study panel who voted against the tax, reiterated the Shumlin administration’s stance.

“The administration actually has been pretty clear that, both as a matter of economic development and administrative efficiency that we didn’t think we should be taxing cloud software going forward,” said Peterson.

“To use a bad pun, the landscape is so cloudy, with what other states are doing,” she said.

According to the study committee’s draft report, there’s no uniform way in which states approach taxation of cloud-based services.

“From my perspective, just administratively, the discussion today illustrates how complex this area is, and how it’s not well understood,” said Peterson. Committee members, for example, disagreed on the basic question of whether cloud computing is a service or a good, which is ordinarily subject to the state’s 6 percent sales tax.

“I certainly think that Vermont should not be on the leading edge of this,” Peterson said. She prefers to wait for consensus from national organizations.

Study committee chair and House Ways and Means chairwoman Rep. Janet Ancel, D-Calais, voted in support of a cloud computing tax, along with Senate President Pro Tem John Campbell, D-Windsor, and Rep. Kesha Ram, D-Burlington.

“If we pass the exemption, which is what the 4-3 vote would do, then we do lose revenue. There’s no question about it,” said Ancel after the meeting. “I think most of us agree that whatever the figure is, it’s likely to grow, even over the relatively short term, even over, say, five years or so … That would be something we’d need to account for.”

Ancel doesn’t know how much the state has lost in forgone revenue thanks to the current moratorium on cloud computing taxes, passed by the Legislature last year and due to expire on July 1, 2013.

The study committee’s recommendation, due in a January report to lawmakers, will add to the debate which lawmakers will ultimately have to take up. The Legislature must decide this year whether to let the moratorium expire or make the cloud computing tax exemption permanent. The Tax Department previously assessed the tax on businesses.

Tom Torti, president of the Lake Champlain Regional Chamber of Commerce president and a committee member, voted to oppose a cloud computing tax, along with technology entrepreneur Trevor Crist, Tax Commissioner Peterson, and Sen. Richard Westman, R-Cambridge, who is a former state tax commissioner.

“Unlike other states that can practice checkbook economic development, companies come to Vermont for a mosaic of reasons,” Torti said. “If over the long term we’re trying to raise money, bring young people here, grow new businesses, why take one of the pieces of the economic development mosaic off the table?”

“We may lose $2 million in revenue over the short term, but we’re likely, if we can grow this sector, to make $10 million or more, in the future,” Torti said.

Torti said a tax would harm both the technology industry and small businesses more broadly.

The Legislature’s economist Tom Kavet previously disputed that notion in testimony to the committee, saying that those who benefit most from a tax exemption are mostly big companies who purchase cloud computing services, not the software industry. 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.”

Campbell was the most vocal critic of the tax exemption on the panel, arguing that forgone revenues would mushroom in future years, depriving Vermonters of much-needed state services. He added language to the draft report requesting that the Legislature, the Tax Department, and the Agency of Commerce and Community Development continue to monitor this narrow tax topic closely.

The study panel also decided unanimously to recommend that Vermont’s sales tax remain restricted to goods, and not expanded to services — despite declining state sales tax revenue and a previous recommendation for an expansion of the sales tax on services from the Blue Ribbon Tax Structure Commission.

The panel also preferred to let Congress take the initiative on whether sales tax should be collected from remote and online sellers of retail goods, who include companies like Amazon.com.

The draft report estimates an annual loss of $40 million in sales tax revenue because of untaxed remote sales, but points out that three distinct pending federal bills, if any single one is passed, would allow Vermont to collect revenue already due.

Although U.S. Rep. Peter Welch, D-Vt., has worked to pass such legislation, Ancel said that progress on an online retail sales tax at the federal level isn’t promising.

The study panel’s three key recommendations are all in line with the Shumlin administration’s preferences.

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  • Cynthia Browning

    While I look forward to reading the Committee’s report and learning more about the reasoning here, based on what I know now I think the recommendations go in the wrong direction: affirming and extending tax exemptions that will require other tax rates to rise due to lost revenue.

    Instead of this approach we should be looking to reduce the sales tax rate by broadening the tax base through eliminating sales tax exemptions. Based on my review of the Blue Ribbon Tax Commission’s report, if we did this really thoroughly, all the way, we MIGHT be able to get the sales tax rate down to close to 2%. Such a low sales tax rate would be unlikely to discourage anything.

    If there are activities that we wish to subsidize, we should do it through the budget where we can control the costs and eligibility, rather than just putting in place tax exemptions with unknown ultimate costs and effects.

    I hope to introduce bills that will embody these alternative approaches.

    Rep. Cynthia Browning, Arlington

  • Brad Fredericks

    The problem here is that the term “cloud computing” is such a vague buzzword that technology experts can’t agree on what it actually means. It is ridiculous that the tax department thinks they can define this term adequately enough for it to be taxed.

    The basic concepts behind “Cloud computing” have been in use since the mainframe computer era in the 1960’s and they are now embedded in nearly every aspect of our lives.

    Do you use Gmail, Hotmail, or Yahoo for email? Well, that most certainly fits the tax department’s definition of “cloud computing.”

    Do you use any mapping software on your computer or smart phone? How about online banking? Online car registration renewal? Those are all examples of “cloud computing.”

    In fact, any web site you interact with through a Web Browser (i.e. Internet Explorer, Firefox, Chrome, Safari) represents a situation where the underlying processing is being performed on a remote server and would constitute “cloud computing.”

    Now imagine having to figure out how to break out the value of these software applications/services so they can be taxed. It’s simply not feasible.

    In addition, will every web site operator in the world owe a “cloud computing” tax to Vermont, or will only local businesses be targeted?

    What will it cost the VT Tax Department to enforce this new tax? Will the Tax Dept audit all software code to determine if any components could be classified as “cloud computing”?

    The mere prospect of having to figure out how to comply with this tax would not only have a chilling effect on Vermont based businesses, but it should equally worry any Vermont citizen who uses a cell phone, computer, tablet, or other device that can access the Internet.

    Rep. Cynthia Browning, it’s disappointing to hear that you’re in favor of this new tax. I strongly encourage you to educate yourself on the basic technological facts of this matter so you can understand the far reaching implications.

  • Cynthia Browning

    Thanks to Mr. Fredericks for his comments, but I note that his is not the only opinion about definitions and enforceability of a sales tax on cloud computing. If it is truly impossible to do, clearly we cannot do it, but it is not clear to me that this is the case.

    I look forward to learning more, but I continue to see no particular reason to privilege one particular form of product or sale or distribution system over others. If we continue to exempt such cyber cloud purchases from the sales tax even as their volume may grow, we will have to raise rates to maintain the same level of revenue. Tax systems should be neutral, not favoring or subsidizing particular kinds of transactions. This is not a new tax, it is the application of an existing tax to a new form of product or distribution of products.

    If you want lower tax rates you should lean against justifying new tax exemptions.

    However, what I would like most would be if other existing exemptions were also restricted, so that the sales tax rate to be applied to cloud computing and all other sales could be very low.

    We are caught in a vicious cycle in which particular industries or groups justify exemptions, which drives tax rates higher, which means more groups ask for and can justify exemptions, which means the tax base shrinks and rates must rise again to raise the same level of revenue.

    Think about it.

    That dynamic is why we should restrict tax exemptions and support or subsidize particular activities through the budget where we can track costs and effectiveness.

    Rep. Cynthia Browning, Arlington

  • David Dempsey

    What’s wrong with spending less instead of taxing more.

  • Douglas Duprey

    Ms. Ancel is one of my reps in Montpelier. I don’t know if she or others full understand the extent of what Cloud Computing is. If we are to tax something first we must understand what it is. I also want to know if she as an individual is willing to put a value annually on what she uses for Cloud Computing services and pay a tax on that?

    I am all for fair and low taxation. However, in this case I don’t think it can be fair or low. This is due to the fact nobody really knows what Cloud Computing is nor its value when they use it.

  • Eric Benson

    It is interesting to see how lawmakers are spinning this as an effort to remove an existing special tax exemption for a small group of wealthy entities, like the oil companies or something.

    This is a totally false, as there was never any special legislative exemption for these intangible services.

    Expanding the sales tax to apply to this type of intangible and difficult to describe service represents a broad new category of taxation that would probably hit everyone in this State.

    Furthermore, this tax stretches the boundaries of what could be considered taxable. Next, they’ll try to tax you for each song you listen to on the radio, because they need to make up for the lost tax revenue from sales in local music shops.

    Representative Browning states in a comment above: “..if other existing exemptions were also restricted, so that the sales tax rate to be applied to cloud computing and all other sales could be very low.”

    Her argument is that lawmakers would be eager to lower the sales tax rate if they can please just let us start taxing new categories of intangible services.

    Of course, voters know that lawmakers like Browning will never move to lower the sales tax rate, regardless of the incremental revenue increases they manage to squeeze out of businesses.