Taxing the Cloud: States Are Looking at How to Do It

There’s an old saying in the military: “If it moves, salute it.” As states scramble for revenue in an increasingly Internet-based society, their expression might be: “If its electrons move, tax it.”

With sales of computer software CDs declining, and consumers downloading more programs and storing more files on the Internet, many states are looking to the “cloud” as a new source of tax revenue.

Think of it like this: DVD sales have plummeted, but streaming video is easy and cheap; thumb drive sales have dropped, while many people are storing data in the cloud. And when the sales of physical goods decline, so does state sales tax revenue.

That gives states an incentive to look for new entities to tax. And the cloud is the new target. But as states look to tax cloud services, questions arise as to whether storage space in the cloud is a tangible “good,” subject to sales taxes, a “service,” subject to use taxes, or neither of those. Different states are making different decisions and the situation is still evolving.

“For states to be able to impose a tax, they have to have some jurisdiction over the entities they are taxing,” said David Shakow, a Gabelli fellow at Fordham University who has written about the taxation of cloud computing.

More