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Losing Revenue, States Consider Taxing 'The Cloud'

By Jonathan R. Tung, Esq. on November 02, 2015 3:10 PM

More and more people store files and purchase digital media using the mobile devices these days. Fewer and fewer people are buying physical media and instead opt to store their entertainment on remote servers. When was the last time you even saw a compact disc?

State revenue has been noticeably lower because fewer people are buying media -- in physical form, that is. CDs, DVDs and other optical discs are the latest victims of the relentless march of technology. As these media formats disappear, so too does the revenue the states used to enjoy. Now states are considering taxing the cloud.

Beyond Physical Media

For years, states enjoyed the sales tax of every sale of a CD, DVD, or other media format sold within their borders. But it's no secret that DVD sales have fallen through the floor. States have been investigating a number of options to make up for the shortfall in state revenue.

Shiny discs are easy to handle because they are physical goods, and thus governed by pretty well established commercial law. But novel questions about the nature of digital entertainment have been coming up.

States want to tax online storage -- the cloud -- but what is it? Is it a physical good, thereby making it subject to the UCC and commercial taxes? Or is the cloud a service and subject to traditional contract law? What if it's neither one of these?

Slippery Digital Goods

Diane Yetter runs her own Chicago based sales-tax consultancy. She describes at least one reason why digital media is different than traditional brick and mortar media. "[T]hey move so fast there's not the time for states grasp them and figure out what to do," she told the Wall Street Journal.

Taxable Electrons

David Shakow, a Gabelli Fellow at Fordham University, threw in his two cents. He commented that it's easy to tax programs like Turbotax because the program is sold in a store, or arrives in the mail. Programs that are used in a state are also easy to tax because their use tax places within defined jurisdictions.

According to Shakow, some courts have even suggested this rule: If electrons are moving, tax them. This theory, taken to its extreme, could lead to disastrous results.

Other theories have drawn a comparison between use of the cloud being parallel to renting physical storage space -- thereby incurring a use tax.

The Board

Currently, organizations push for a more nationalized scheme for online commerce taxation. For example, The Streamlined Sales Tax Governing Board is a group that promulgates a more normalized sales tax scheme across the nation. Currently, there is no uniform standard or agreement among the states as to the nature of the cloud -- and thus, no agreement as to the proper way to tax it. Congressional intervention may ultimately be needed to settle state wrangling on this very pressing legal issue.

Amazon Primes You for Taxes

In the meantime, it probably slipped under your radar that Amazon will now be collecting state sales taxes on goods it sells in about half of the states -- more than 80 percent of the US.. population. You thought you could get away from that sales tax, huh? Right.

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