And Yet Another New Tax Target: The Cloud

And while we're on the subject of a new income tax revenue stream for the states see Joe's post below, consider a recent report in the BNA Computer Technology Law Report (12 CTLR 312) that examines the possibility inevitability of states collecting taxes from cloud services.  Software as service is still something akin to tangible physical software as far as the New York State Department of Taxation is concerned.  Adobe markets photo editing capability in the form of an online subscription.  Consumers can subscribe to the software as an alternative to buying Photoshop.  New York would subject the subscriptions to state and local taxes even though no copies of the online code are transferred to users.  As the Department states:

The location of the code embodying the software is irrelevant, because the software can be used just as effectively by the customer even though the customer never receives the code on a tangible medium or by download.

New York State, of course, has the power to interpret its rules in its favor, so why not?  Other states are beginning to follow suit according to the report.  Michigan has a similar ruling, with Illinois and Louisiana looking at the issue.  The taxing landscape may be uncertain now, as the report suggests, but I think other states will join the bandwagon once cloud services and online software access become more popular.  The report notes that Congress is considering the Digital Goods and Services Tax Fairness Act to set national standards as to which jurisdiction would be able to collect the tax when more than one can make the claim.  That may make some states unhappy with the choice out of their hands.  You can bet that if treating software that is accessed but never transferred is considered the same as tangible property, states will find a way to further tax things such as streaming media rentals, or any type of subscription delivered over the web.  [MG]