States follow the money into the cloud

With the economy still slumping, states desperate for tax revenue have started looking at the IT equivalent of books and CDs: the data in the cloud.

According to a recent Bloomberg story, the debate centers on whether firms that sell software and data accessed through the cloud are peddling a taxable good or a nontaxable service. One apt analogy likened cloud-based services to things that you might find at an office supply store, according to states’ definitions of taxable goods that consider those products to be like software you’d stick in a shopping cart (the squeaky wheel kind, not the virtual kind).

With the global market for cloud computing estimated at $40.7 billion this year and projected to grow to $241 billion in 2020, the potential ramifications are beyond huge.

“It is an enormous burden on businesses trying to figure this all out,” Jim McGeever, chief operating officer of California-based NetSuite, a cloud-based financial management service provider, told Bloomberg.

A number of major tech companies support proposed federal legislation that would limit states’ taxing authority of digital goods and services. Of course, that would affect many industries beyond IT.

The lobbying’s already begun. In the absence of clear-cut guidelines, companies are focusing pursuing rulings from tax authorities to ensure that they don’t run afoul of evolving laws. When it comes to cloud services, the emphasis for public and large enterprise clients will be on compliance. And states are sure to push back – because they can’t afford not to.

About the Author: Ana Cantu