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Taxing Cloud Services: How Do You Catch a Cloud and Pin It Down?

  • Feb 18, 2013 | Gail Cole

 With Clouds Come Taxes.

"How do you catch a cloud and pin it down?"

In The Sound of Music, the nuns wring their hands, turn their eyes to the heavens, and ask this question of Maria, the young postulant who climbs trees, waltzes on her way to Mass, and whistles on the stair. These days, a similar question is being asked around the country by state departments of revenue. How do you tax a cloud? Let the hand-wringing ensue.

"Cloud computing" refers to computing resources delivered over a network. Users access data that is stored remotely rather than on their own computers or servers. Oftentimes the server used is located in a different state than the business using it.

It should come as no surprise that as more and more businesses discover the usefulness of cloud computing, more and more states are wondering how to tax it. The potential tax revenue is enticing. Yet the question is more easily asked than answered.


As of this writing, a number of states do tax cloud computing services. "Arizona, Indiana, New York, [and] Texas … have adopted various approaches to apply sales tax to cloud services." Idaho taxes the use of software "when there is payment for access… ." (Idaho Code § 63-3616(b)(i)). In Washington State, "Sales of digital products are subject to sales tax. Digital products are digital goods or digital automated services… . Sales tax also applies to … remote access software," although certain sales may be eligible for exemptions.

Not Taxed

In other states, cloud computing services are not subject to sales tax. These include, but are not limited to, Kansas, and Nebraska, Tennessee, Virginia, and Wisconsin.

There is a great deal of confusion around this issue. Take Idaho, where services are not taxed but where "subscription software delivered online" is now subject to sales tax. The Wall Street Journal reports that surprised businesses are finding themselves subject to audits.


Late last year, a tax panel in Vermont voted against taxing cloud services. Governor Peter Shumlin (D) has proposed permanently exempting cloud computing services from sales tax. Reaction to the proposal is mixed. Janet Ancel (D-Calais), chair of the House Ways and Means Committee, has said "There really needs to be a compelling reason to create a new exemption. I haven't been convinced that a compelling reason is there." She is worried about enacting new exemptions when "tax revenues are tight."

The governor and others in favor of making the exemption permanent see it as a way to encourage business. The challenge of taxing an ever-evolving technology has also been referenced.

Do you know how your state taxes cloud computing services?

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Vermont State Rates

photo credit: ecstaticist via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.