Tax laws are always a number of beats behind technology. Interstate telephone calls were taxed according to the billing address of the telephone customer and the positioning on the end of a few copper wire of sending and receiving equipment. Now one end of a choice can be on a subway line, the opposite in an airplane traveling from Boston to Paris. Who gets to tax it?

The most recent conundrum: Both business-to-business and business-to-consumer transactions are moving to the cloud, and a few startups are putting all in their IT infrastructure in provider sites. How, in an integrated 50-state economy, are tax concepts speculated to take care of this in a method that’s practical and doesn’t become an unfair burden for any entity? Without a doubt , all computing occurs on servers which can be physically located somewhere. Maybe you hire a cloud provider to store company records. You could not know where those records are at any given moment. The storage vendor won’t know either, since it maintains server farms in multiple states or countries.

People considering easy methods to tax cloud computing generally break it down into paradigms that roughly track the conventional SaaS/IaaS/PaaS model. However, that’s where standardization ends.

Sourcing Approaches

Old-fashioned transaction taxes generally source sales to customer location. Subject to jurisdictional constraints, in the event you run a furniture store in North Carolina that ships products all around the country, you generally collect tax in response to destination.

But in cloud computing, there’s no physical thing whose destination might be tracked. So where should transactions be sourced? Three obvious possibilities: the placement of the seller, the server location and the billing address of the client.

There are two issues of approach No. 1. First, the seller can have facilities and staff in multiple states or countries, and it is able to do whatever it does to generate or complete a sale in additional than one place. Second, this approach creates a robust incentive for in-state purchasers of cloud computing to purchase services from vendors located outside the state.

Approach No. 2 has many adherents among state governments, but it is also flawed. It permits vendors to prevent tax through the use of servers located in jurisdictions which have no sales tax, like New Hampshire or Oregon. And often times, the seller won’t even know where the server doing a given processing function is found.

Approach No. 3 is straightforward and simple to audit, but additionally it is highly subject to manipulation. A vendor and purchaser can “conspire” to have bills sent to a state that either doesn’t tax the transaction or uses an extra sourcing principle.

Thanks to these problems, as efforts to tax cloud computing proliferate, the sourcing methodology likely to be embraced relies on location of use of the goods and services sold. There’s precedent for this approach inside the taxation of electronically distributed software by countless states.

But how clear is it where SaaS or data processing or storage services are utilized by a multistate business? Certain styles of enterprise-wide software are naturally considered for use in proportion to employee head count in a state, because virtually everyone within the company uses the software. But other software with a more limited function — CAD/CAM, sales force support or accounting support, for instance — can be used more sporadically and by a more fluid cast of employees. A similar can be said of knowledge storage and knowledge processing services.

Some states have addressed this problem by claiming to simply accept any reasonable method for apportioning use of computer services by a purchaser so long as the strategy is continually applied. The risk this is that the states will “chase the cloud” by applying rules that, while in response to use, define the position of that use variously. Because states generally don’t offer a credit for a use tax paid in another state, this should easily cause systematic taxation of an identical services in multiple states.

One of these multiple taxation generally doesn’t violate constitutional principles and therefore is immune from attack on those grounds. However the problem cries out for an answer that imposes uniformity around the states inside the sourcing how to be applied, or at the least a typical sourcing “safe harbor” that states might be forced to just accept. That kind of solution requires congressional action, however, and within the fractured political environment during which we discover ourselves, a congressionally imposed technique to a taxation issue is usually a long term coming.

Whether you’re a provider or a shopper of cloud services, monitor your exposure to sales and use taxes, especially within the states where you’ve an important presence. It is usually really useful to become involved in industry or tax associations, whether or not they be keen on local issues, just like the Associated Industries of Massachusetts, the Massachusetts High Technology Council or similar groups based to your state, or national organizations, reminiscent of the Council on State Taxation or the Tax Executives Institute.