Sales Tax: Is Your Head in the Clouds? (Cloud Computing, that is)

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As I have mentioned on this blog before, the sales taxation of digital products and electronic commerce have become increasingly more important issues. As everyone knows, states are hurting for revenue, and since our economy has moved more and more towards electronic commerce, the states must figure out a way to tax it, or else lose out on much needed revenue. According to Wikipedia, "Cloud computing" describes a new supplement, consumption and delivery model for IT services based on the Internet, and it typically involves the provision of dynamically scalable and often virtualized resources as a service over the Internet. The term cloud is used as a metaphor for the Internet, based on the cloud drawing used to depict the Internet in computer network diagrams as an abstraction of the underlying infrastructure it represents. Typical cloud computing providers deliver common business applications online which are accessed from a web browser, while the software and data are stored on servers. These applications are broadly divided into the following categories that emphasize the concept of "Everything-as-a-Service": Software as a Service (SaaS), Utility Computing, Web Services, Platform as a Service (PaaS), Managed Service Providers (MSP), Service Commerce, and Internet Integration. How are the states going to tax it? The problem with cloud computing is where is it located? What state has the right to tax it? Some states may tax it where it is used. Some states may tax it based on the location of the servers. Some states may tax it where the office of the cloud computing provider resides. This is only the beginning of the state of confusion regarding the state taxation of cloud computing and other electronic commerce. As I have mentioned in earlier blog posts, some states like Washington, North Carolina, and Wisconsin have updated their laws recently to broaden their tax to tax more digital products. I have also mentioned how New York is really reaching to expand the sales tax to services delivered over the internet, not just tangible personal property delivered electronically. Impact? If you or your client is involved in cloud computing or selling just about anything over the internet, chances are, some state wants to tax that sale. If you have any questions regarding the sales taxation of cloud computing, digital products, software or services over the internet, please contact me at brian.strahle@bakertilly.com.

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