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Could Cloud Computing Cause More Stress Come Tax Time?

Could Cloud Computing Cause More Stress Come Tax Time?

Money doesn’t grow on trees. Nothing under the sun is free. Aphorisms like these saw concepts such as cloud computing escape from the reality of high cost and taxation — until now. The cloud community is up in arms at what’s recently taken place in Vermont, where an extremely suspicious and cryptic financial technicality has resulted in a wave of tax audits that could set precedents for cloud computing endeavors in other states.

The Department of Taxes in the State of Vermont released a bulletin in 2010 claiming that “prewritten software that is licensed for use and available from a remote server” would be subjected to sales and use taxes. Despite the existence of this technical law, the State remained mum on enforcing it — that is, until cloud computing suddenly became en vogue, via greater visibility and use in the business community.

Scores of Vermont businesses who had used cloud computing to some extent suddenly found themselves saddles with bills for back taxes stemming from this boutique tax loophole retroactively invoked with convenient timeliness. After a wave of publicity regarding this fiasco (including a major write-up in Forbes), the State’s House Ways and Means Committee passed a bill that would refund nearly $2 million that was seized by that same 2010 cloud computing tax.

Yet Vermont business owners refused to be satisfied with this palpable yet paltry mea culpa. They’re fighting for a cloud sales tax exemption, a request to which lawmakers have yet to concede. Although this Vermont issue may seem petty to some corners, the resolution of this cloud-versus-taxes conversation will set the precedent for similar happenings around the country.

A similar law advocating a cloud computing tax is taking shape in Utah. Colorado, too, is mired in the same discussion; its “stool pigeon requirement,” or a state-enforced demand that online businesses contact their customers to inform them of their sales tax dues, is also a heated issue. Most alarming is what’s happening in Texas, where a governmental committee has already formed to ascertain how the state could benefit from taxation to the cloud.

Unfortunately for the cloud computing community, taxation is a conversation of “when,” not “if.” Although the particular methods and means of a “cloud tax” would have to be specified and nuanced according to the demands of a unique state, there’s little chance that our economy-addled nation would ignore this tech gem that we’d like to keep secret from the feds. Companies that sprawl nationwide, or internationally, like IBM, will weather these taxes fine. It’s the small businesses out there who could be undone should the cloud tax weigh too heavily over their heads.

By Jeff Norman

Jeff Norman

Jeff Norman is a freelance writer currently based in New York City. He's moved into writing about cloud computing from substantial work in culture and the arts. He earned his undergraduate degree in English at Stanford and has studied at Oxford and Cambridge.

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