Tax Issues In Cloud Computing
Today, taking advantage of computing power has moved toward the subscription model away from the self-management and acquisition model. Through the subscription model, a business enterprise needs to tap into the skills of third-party managers in order to take advantage of the latest tools. The continuous evolution of cloud computing has provided many benefits to business, but it has also affected some of the present tax rules. Through cloud computing, accountants can access information and software anywhere, but location is an important consideration as regards taxation. Thus, there are challenges faced by cloud computing when it comes to tax regulations.
Cloud computing allows a user to access software and information through the Internet. Servers are no longer maintained and operated by a single company but are outsourced to third-party vendors who have a pool of more experienced and qualified IT personnel to deal with server problems. Because of this setup, a business can concentrate on growing the business rather than being tied down by server maintenance. Any device that can connect to the Internet can be used by a user to access software and information. This kind of setup can also bring down internal expenditure and IT costs.
However, cloud computing is also faced with numerous tax issues, such as sales tax. Traditionally, sales tax is levied on tangible personal property, but today, there is a dilemma regarding software because it is intangible—even federal income tax regulations treat it as an intangible. However, software must be stored in a tangible product such as a hard disk or a CD; thus, some states, such as Vermont, have treated off-the-shelf or prewritten software as tangible property, whereas in other states, such as California, software is treated as intangible property.
If software is treated as tangible property, it must be classified as either a tangible service or a tangible product. Some states levy sales tax on services that include software and computing, whereas California, for instance, does not, because it is treated as an intangible property that can be deployed electronically. In terms of maintenance contracts, some state laws follow the Streamlined Sales and Use Tax Agreement in order to categorize software maintenance contracts. If sales tax is computed using the destination approach, conflicts can arise because a client can buy several copies. That client may also create multiple copies for use in at least one state.
Conflicts can also arise with the computation of sales tax on software, especially when there is no clear distinction whether the software is part of the sales transaction or transferred. Some retailers bundle software with hardware where the software is treated as a hardware sale. Also, some vendors provide their customers with their own software for internal use only.
Some states have sales tax regulations when it comes to the use of storage, data, and software in cloud computing. In general, those states which levy sales tax on prewritten software also charge sales tax on software accessed by a business on a third-party server. Some states that do not tax software delivered electronically do not tax software used in cloud computing either.
As cloud computing is expected to grow, state laws must be able to fully determine its taxability, as cloud computing continuously challenges taxation rules in most states. As tax agencies strive to understand each cloud computing transaction, those people involved in the formulation of legislature must be able to determine if tax laws need to be changed or updated. It is still premature to conclude that Congress will be able to come up with uniform tax laws in this regard, although some experts believe it will someday resolve tax issues in cloud computing, just as it did with the Mobile Telecommunications Sourcing Act. Some states may need to draw up sales tax exemptions because online education may become more expensive because it is not exempted from sales tax.
By Florence de Borja