The Sky Is The Limit: Taxing The Cloud

Author:Mr Matthew Litz

Does your business provide cloud-based computing services to customers in various states or outside the country? If so, your business may unknowingly be subject to sales tax and use tax in the jurisdictions where your customers are located, and you could be subject to value-added tax (VAT) if those customers are located outside the US.

The cloud blurs geographic boundaries One challenge with cloud-based services is defining where the transaction occurs and where the service is delivered. Even if your business does not perform any services outside of your home state, you could be assessed taxes (and perhaps interest and penalties) by the jurisdiction in which your customers reside.

In an effort to keep up with changes in technology, states are amending their tax laws to subject cloud-based services to sales and use tax. For example, the New York Department of Taxation and Finance determined that cloud-based services that were hosted on servers located outside of New York were nonetheless subject to sales and use tax in New York if the software is accessed by customers with New York addresses.

Value-added tax and "place of supply" rules This is not just a domestic issue. Many countries have adopted "place of supply" rules when assessing value-added tax to cloud-based services. Generally, these rules focus on either the location of the service provider or the location of the customer to determine the tax consequences of a transaction. Thus, a supplier of cloud-based services may be subject to VAT based on the location of its customers.

Because many businesses are unaware of the tax...

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