Weekly Round-Up: The Tax Conundrum That Is Cloud Computing

A small business owner goes online monthly to manage her accounts and pay her bills. She is sitting in one state and using software located on a service company's server in another state to cut a check that will be automatically deposited in the account of an employee in a third state.

Is she accessing a nontaxable or exempt information service? Using a taxable data processing service? Acquiring a short-term use—by lease or license—of prewritten software (taxable as tangible personal property in a number of states)? Or is she purchasing a nontaxable digital good? And which of the three states, if any, is entitled to tax that transaction?

If the business owner looks to existing guidance to discover whether a tax is owed, chances are she will come away more confused than enlightened. This is the world of cloud computing—where activities that are rapidly moving to the web are also falling through the cracks of a sales tax regime crafted for a Depression-era manufacturing economy.

Little guidance exists on how sales taxes apply to cloud transactions or how they should be sourced. Auditors and taxpayers alike are relying on a morass of conflicting statutes, letter rulings, and regulations to determine the taxability of transactions involving remotely accessed software.

And the answers are often muddy. The same activity could be at once subject to sales tax or nontaxable, depending on how it is characterized (and documented). The sourcing rules for such activities vary from state to state, and in the absence of any direct letter ruling, the taxpayer is often left to guess whether—and to which jurisdiction—a tax is due.

On the flip side, tax departments lack the resources to address the tax policy questions raised by the cloud. Meanwhile, business interests have begun to push for a federal solution—requiring states that want to tax these transactions do so through new legislation and not administrative measures.

For a complete look at the issues surrounding the emergence of cloud computing, check out the article by BNA staff editor Dolores W. Gregory, BNA assistant managing editor for state taxes Steven Roll, and BNA state tax law editor Christine Boeckel, found in this week’s issue of the Weekly State Tax Report.

In other developments…

For a look at recent updates to New York’s Empire Zones Program, check out BNA Tax Law Editor Kathleen Caggiano’s article in this week’s issue of the Weekly State Tax Report, which can be read in its entirety here.

Sutherland issues its November 2011 issue of Salt Shaker, which contains a review of three cases that tried to get before the U.S. Supreme Court.

Morrison & Foerster releases its December 2011 issue of New York Tax Insights, which looks at a recent case requiring the Department of Taxation & Finance to turn over audit software in response to a Freedom of Information Law request from a taxpayer.

Kelly Phillips Erb, a contributor at Forbes, shares her recent experiencewith holiday shopping online and sales taxes.

Compiled by Priya D. Nair
Follow us on Twitter at: @SALTax
Join BNA's State Tax Group on LinkedIn here: http://www.linkedin.com/groups?gid=1821701&trk=hb_side_g