Policy Documents

Thinking Out Cloud: California State Sales and Use Taxability of Cloud Computing Transactions

Matthew Adam Susson –
March 22, 2012

Confronted with growing budget deficits and decreasing tax bases, states have sought to expand sales tax laws to capture revenue from sales of digital products. Just as states have begun to impose such taxes, however, the shift from downloaded products to cloud-based data and applications — accessible from anywhere in the world — poses new challenges to the states’ ability to reach such transactions with their taxing powers. 

Thus far, state governments have taken inconsistent and patchwork approaches towards determining taxability. Rather than supplement or amend state tax codes to address cloud computing transactions directly, they have sought to apply existing provisions dealing with tangible personal property, services, or information processing. As a result of their piecemeal approaches, cloud service providers and their customers are left without definitive guidance as to their sales and use tax obligations, which may vary substantially state-to-state. 

If California wishes to stanch its revenue bleeding and budgetary problems, it must do more than simply repurpose existing state provisions ad hoc and shoehorn new business paradigms into old categories. California’s ongoing transition to an information services economy requires a coordinated effort to effectively tax crucial revenue. California must amend its tax code to allow taxation of some services — specifically digital services — if it hopes to maintain a steady stream of sales tax revenue. It must, however, propound comprehensible guidelines if it wishes to incentivize innovation and provide certainty and stability to service providers and retail customers regarding their tax obligations. California should also work in concert with other states to commonly define goods and services and create a consistent national vocabulary, which would simplify the levying and collection of sales taxes on interstate transactions, and pave the way for unifying federal action.