Taxation of Cloud Services

Tax Professionals Resource
August 6, 2012 — 1,218 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

Cloud computing is becoming an increasingly popular method for running application software and storing data in centralized computer systems. Cloud service providers offer customers and users access to their data through the internet. Both businesses and consumers utilize services provided by cloud computing. For instance, a business might use a cloud application for accounting while a consumer might use cloud computing to save and share personal photographs, videos or other information.

The great thing about cloud computing solutions is that they don't require you or your company to purchase or install software and fees are typically subscription-based. Some vendors may charge a business or customer month-to-month or annually, while other cloud services are completely free of charge. Overall, these solutions are relatively affordable and accessible, both of which are aspects that have added to its popularity and widespread use.

According to CloudTweaks, most cloud servers are no longer operated by a single company but instead outsourced to third-party vendors. These vendors are well equipped to handle server problems and have the qualified staff to deal with any other issues that may arise. Outsourcing this to a third party allows companies to concentrate on their business instead of worrying about server maintenance and IT costs. However, there are many tax issues that are associated with cloud computing, including sales tax.

Sales tax is easy to determine on tangible property such as a car or a new computer, but what about when it is something located in cyberspace - something in the cloud? There has recently been a great deal of debate regarding how to tax software that is not stored on a tangible product like a CD or hard disk. The source reports that different states have handled this differently. While Vermont states off-the-shelf or prewritten software is tangible property, California states that it is intangible property.

Tangible and intangible property is taxed differently and as cloud computing continues to grow, states will have to create laws that are able to fully determine storage, data and software taxability in the cloud. States are currently working to figure out how to handle this dilemma. In July 2011, only four states had laws about cloud taxation, but by the end of 2011 this number had doubled and more continue to follow suit.

NetworkWorld.com reports that many states are looking toward the rulings in Utah as a template of how to tax cloud services. In February 2012, the state rules that web services that charged a fee constitute a sale of service and are subject to sales tax. However, only time will tell how cloud computing will be handled in regards to taxation and whether the Federal government will be able to create a standardized ruling on the matter.

Tax Professionals Resource