Research & Commentary: Taxing Cloud Computing

Published November 13, 2012

Cloud computing has fundamentally changed how consumers purchase and use software and computing services, by moving many of the functions online. The shift of resources such as email, database, and security services to a cloud infrastructure takes the burden of IT infrastructure off the consumer, saving both time and money. However, this rapid growth has made cloud computing a tempting target for new sales taxes. 

States are determining whether to consider the products tangible, which makes them taxable, or a service, which would go untaxed in many states. Another factor is that a state cannot impose a tax on a company offering cloud services if the servers, offices, and facilities are not located in their state, under the U.S. Supreme Court’s Quill Corp. v. North Dakota ruling. The physical presence (“nexus”) standard in this ruling has been an important taxpayer protection. 

There are two general approaches to taxing software: either as tangible or intangible property. Both systems pose unique problems. 

In Vermont, where software is treated as tangible, the state’s recent declaration that it would assess a sales and use tax on “prewritten software that is licensed for use and available from a remote server” has met a strong backlash from the business community, which may be on the hook for back taxes if the change occurs. In states such as California, where software is treated as intangible property, determining where the use of the property actually occurs is difficult, which makes charging a fair and accurate tax problematic. 

State legislators should avoid placing new, burdensome taxes on cloud computing and abide by the physical presence standard. Otherwise, cloud service providers will be discouraged from setting up shop in-state or providing these services there. 

The following articles examine cloud computing and proposed taxation from multiple perspectives. 

Ten Principles of Telecom Policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder examine the results of telecom reform in Indiana, the advances made by other innovation leaders in the telecom market, and how other states can follow their lead to reap the rewards of new investment in telecommunications services. 

Eight Principles of Telecommunications Policy
The Washington Policy Center lays out a basic framework for how legislators and citizens can incorporate many of the basic free-market principles used in discussions of budgets and taxes, education, health care, and the environment, and apply them to debates over technology and telecommunications policy. 

Research & Commentary: Taxing Internet Sales in Connecticut
Connecticut is one of many states struggling to balance their budgets by introducing taxes on Internet goods and services. State senators have introduced a bill (SB 400) to tax digital downloads, including applications, songs, ringtones, electronic books, and movies. The Heartland Institute’s Bruce Walker examines the proposals in Connecticut and offers more information about taxing Internet downloads. 

Policy Tip Sheet: Myth Vs. Fact – Internet Taxes
Heartland Institute Government Relations Director John Nothdurft examines several myths and facts about Internet taxes. 

Should We Tax the Internet?
Merrill Matthews Jr. of the Institute for Policy Innovation examines Internet taxes and their likely impact on the new economy. 

Don’t Tax the Cloud!
David Linthicum of InfoWorld discusses a recent survey of tax professionals at KPMG, which concluded the “cloud is still so new that there still needs to be homework done on what may or may not be taxed.” Linthicum argues for a tax moratorium for the cloud, to hasten its growth. 

How the Tax Man Followed Amazon and Apple to the Cloud Computing Party
Erika Morphy reports on the efforts in many states to impose sales taxes on products purchased through the cloud. 

No Improved Visibility for Cloud Computing Taxation
Kendall L. Houghton and Maryann H. Luongo discuss seven court rulings on cloud computing in 2010 and 2011, ranging from an Arizona ruling that explains cloud computing and directly addresses sales taxation to an Illinois ruling that acknowledged a taxpayer’s request to address cloud computing but refused to rule on the question of taxation. 

Nuts-and-Bolts Answers on Cloud Computing
Writing for TaxAnalysts, Timothy Noonan examines several states’ treatment of cloud computing questions, noting the problems they’re having in defining how to treat cloud computing technologies. 

Thinking Out Cloud: California State Sales and Use Taxability of Cloud Computing Transactions
Matthew Susson studies California’s efforts to tax cloud services. He argues the state must create comprehensible guidelines if it wishes to incentivize innovation and provide certainty and stability to service providers and retail customers regarding their tax obligations. He proposes that California work with other states on a common definition of goods and services and create a consistent national vocabulary. 

Tax Issues in Cloud Computing
Florence de Borja highlights the challenges faced in justifying taxes on cloud computing. “The continuous evolution of cloud computing has provided many benefits to business, but it has also affected some of the present tax rules. Through cloud computing, accountants can access information and software anywhere, but location is an important consideration as regards taxation,” she writes. 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Tech News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].