Can Increased State Taxation Hinder Cloud Computing? – Part 2
“I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.”
- Arthur Godfrey (1903-1983), American radio and television personality.
In Part 1 of this two-part article, I laid out the current environment as regards cloud computing and where the government stands with regard to this new technology (See: Can Increased State Taxation Hinder Cloud Computing? – Part 1 ). Now, once it has been established that there is money in cloud computing, it is not unexpected that a cash-strapped state would like to have some of it. And the legal way to do that is by taxation.
The basic premise of cloud computing is computing without borders. However, for states that depend on sales tax revenues on goods sold within their borders, such a situation is definitely not welcome. The state governments would like to believe that cloud-based services are analogous to off-the-shelf software purchases, and the latter, of course, are taxed. On the other hand, cloud computing companies assert that shifting the software out of a physical location transforms what was once a tangible item into a service, and hence, not subject to state sales taxes.
Consequently, intense debate has started on whether companies that sell software and data accessed through the cloud are selling a taxable good or a nontaxable service. In the absence of clear rules on taxing cloud computing, dozens of confrontations between businesses and governments over individual transactions are taking place across the country.
In fact, businesses have already started their efforts to encourage laws to prevent states taxing them in such situations. Amazon, Apple, Time Warner Cable, and Verizon Communications are part of the Download Fairness Coalition formed to lobby on the issue and have enlisted the support of lawmakers across political affiliations. Senator Ron Wyden, an Oregon Democrat, and House Judiciary Committee Chairman Lamar Smith, a Texas Republican, are both backing federal legislation that would regulate and limit states’ taxing authority of digital goods and services as provided over the cloud.
Now, here’s my take on the situation. Imposing sales tax when there is no transfer of tangible goods is extremely difficult. After all, a New York-based firm may purchase cloud services from a Los Angeles-based cloud computing company with data centers in Seattle, with the services being used by the buyer’s employers in Boston and Chicago. Which state will have the right to impose sales tax?
Secondly, in answer to the question posed by the title of this article, I don’t believe that increased taxation will appreciably hinder the onward march of cloud computing. For one, the corporate tax rate in the nation is among the highest in the developed world; that hasn’t stopped the United States from being the center of the world economy and the base of operations for 90% of the Fortune 500. As Warren Buffet explained, irrespective of taxes, businesses will flourish where the environment is conducive to them. Secondly, government interference, even in cloud computing is not new (See: Is Cloud Computing a Threat to Consumer Rights?); that hasn’t stopped more and more people from signing up.
In conclusion, increased state taxation, even if it happens, will not appreciably affect cloud computing.
By Sourya Biswas