Transcending The Cloud - A Legal Guide to the Risks and Rewards of Cloud Computing: Pennies From Heaven - U.S. State Tax Implications Within Cloud Computing


Introduction — The Landscape

Faced with growing budget deficits and decreasing tax bases, some states in the United States are searching for new and broader avenues for revenue generation. Digital products and electronic commerce are two of the most notable, recent targets in the states’ search for revenue. Just as many states have begun to expand their sales - tax laws to reach digital products, such as music, software, and audio - visual downloads, the cloud computing phenomenon, and the shift from downloaded products to Internet-based access to applications and data “in the cloud,” has the potential to once again take a large segment of digital transactions outside of the states’ taxing reach. At the very least, cloud computing promises to raise a series of new questions, the most basic of which is how states will presumably impose sales tax on digital transactions.

Currently, 461 U.S. states impose some sort of sales tax, at least 12 states impose a sales tax on digital goods, and another 17 states are likely to consider legislation to impose a sales tax on digital transactions this year. Thus, sales-tax issues are likely to be a significant concern not just for cloud computing vendors, but also for most consumers of cloud computing services with U.S. operations.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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