States Focus on the Taxation of Cloud Based Services

Your Guide to State, Local, Federal, Estate + International Taxation

With the ever-increasing advances in technology, taxation of cloud based services and products have recently piqued the interest of state taxing authorities. Many of the existing state tax laws do not specifically address these issues, since the laws were written when these types of services were not very typical. As such, many states have begun to create new authority to address and provide some sort of taxing framework for these services.

Some states have been updating old laws in an attempt to provide clarity to legislation that has been ambiguous in these areas. While some states have updated legislation to remove cloud based services from taxation, other states have taken a more aggressive approach in attempting to tax these services. Even so, those states who have attempted to tax these services have faced opposition from the local business community who fear the rising cost of doing business. Nonetheless, there has been an ongoing effort to piece together clear guidance as these issues continue to arise and states are now making more defined decisions in these areas.

The National Conference of State Legislatures (NCSL) published a set of principles to aid states when developing legislation on cloud computing. These principles encourage states to enact new law rather than apply old law to these new types of transactions. This would allow states to form a specific set of laws, set an effective date to allow adequate time for feedback, and provide time for businesses to prepare for compliance.

The process of litigation and legislation to provide a simple and more unified tax regime for cloud based services among states has proved to be a slow process thus far. The end does not appear to be in sight yet, but states are at least taking strides to figure it out.

By Jill A Helm, CPA