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April 26, 2013
Tax Analysts Hosts Conference on States’ Taxation of Cloud Computing

WASHINGTON, D.C. – Tax Analysts, a nonpartisan, nonprofit organization that provides tax news and analyses, held a conference today at the National Press Club at which an esteemed panel of tax experts discussed the taxation of cloud computing.

The panel discussion, which Tax Analysts President and Publisher Christopher E. Bergin moderated, included presentations by Cara Griffith, editor in chief of Tax Analysts’ state publications; Kelley Miller, associate, Reed Smith LLP; Mark Nebergall, president, Software Finance and Tax Executives Council; and Dylan Waits, managing senior policy counsel, Washington Department of Revenue.

In their presentations and in the subsequent discussion with the audience, the speakers focused on how states are working to fit cloud computing technologies into existing laws that were enacted well before the advent of cloud computing.

“States are now looking for revenues wherever they can find them, and taxing cloud computing has become an attractive target,” said Bergin. “But the difficulty lies in how to do it. The cloud operates in a borderless environment. If there’s no physical location, then which state gets to tax it? And could the users of cloud computing find themselves taxed twice, due to different ways that different states decide to tax the cloud?”

“In the past, whether a cloud computing transaction was taxable was primarily determined by whether the service model was truly a service,” noted Griffith. “Now, as more software is being accessed via the cloud, states have changed their focus to the level of access that a user has ‘in the cloud.’ For example, states will examine whether the customer appears to be manipulating software or whether the customer is more accurately receiving a service. The distinction as to the type of service is not as paramount these days as is the level of access. If it looks like a customer is manipulating software, then the argument may be made by a state that the customer really received a license to use software and the transaction is taxable.”

“The states want to catch up to technology,” noted Miller. “But the problem is that the technology is evolving much faster than the law. For example, Google recently announced that they are set to introduce the next wave in cloud technology. Do we commit to a law change today and have that not match the technology of tomorrow? The challenge will be how well the law can keep up with the rapidly changing technology of cloud computing.”

Nebergall highlighted some of the tax policy work that had been done since the 1990s that might provide guidance on the definition of cloud computing. “The Digital Goods and Services Tax Fairness Act of 2011 would have had some very profound impacts on how states deal with taxing cloud computing,” he noted. “It said that any provision of a digital good, which is defined as downloadable movies, music, books, and software, is going to be characterized as a provision of service unless the customer received a physical copy of the digital good. This would have helped provide a clear distinction between what is a digital good and what is a digital service. By this definition, cloud computing would fall in the service category. Fast forward to 2013, and an amendment to the Marketplace Fairness Act of 2013 introduced by Senator Thune (R-SD) just this week excluded the service provision and eliminates the prospect of additional clarity around what is the sale of a good and what is the sale of a service in this area.”

“Unfortunately, the industry definition of cloud computing is continually changing,” agreed Waits, who has played a role in the taxation of cloud computing for Washington State. “Information as a service, digital goods – these definitions come and go. For taxpayers, customers and businesses trying to navigate the landscape, the best recourse is to pay attention to Cloud Service Agreements (CSAs) which outline exactly what you are buying and how that fits into a state’s tax structure. Taxpayers can use CSAs and analysis of the states’ general sales and use tax laws to understand their individual tax liability.”

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