If two things are certain, they are death, and taxes. With that in mind, we’re not surprised to hear that some states are passing legislation on the taxing of cloud data storage and transmission. According to a recent article, taxing cloud data transfers and cloud-based transactions to and from cloud storage locations could be the next big thing in government pick-pocketing. Kelly Miller, Tax Attorney at Reed Smith LLP, explains that sales tax applied to personal property includes anything, “seen, felt, weighed or measured.” Data is measurable and codes can be seen but can that really be considered tangible and taxable?
According to Miller, some states are already taxing the lease of server space as actual property while others haven’t put these types of policies in place. Deciding how to tax data can get very complicated. Suppose a company is based in a location with certain data tax codes while their data storage facilities exist in a state, or even country, without. Data taxing then becomes a subject for interstate or possibly international tax policies which could cause further confusion. The Federal Government is likely to be called into play to sift through this tax mire, though likely not for some time.
While this confusion is befuddling tax authorities, some companies are already finding various tax strategies in these early stages of cloud computing. A recent article from datacenterknowledge.com explains that by offering reserved space on their cloud, Amazon Web Services allows companies like Netflix to purchase extra space which can be deducted before any actual service has been rendered. These tax deductions occur on this year’s taxes rather than whenever service is provided, whether that happens months, or years from now. Basically, Netflix is deducting the cloud storage as though they purchased an actual physical storage unit, but according to Wray Raves, CPA, in Focus.com’s Q&A section, it is unlikely that this type of strategy will be successful under closer IRS challenge and will likely be challenged should more companies adopt this type of strategy.
While federal and local authorities work hard to firm up these tax policies, you can take measures to be sure you and your client’s noses are clean when tax season rolls around. Audit, tax and advisory firm KPMG has released a document explaining how cloud taxing will be implemented, or how it should be approached. Steven Fortier, principal-in-charge of KPMG’s Cloud initiative explained in a recent article, “Most tax authorities have yet to develop detailed rules and guidance for cloud-based operating models,” he also mentioned that companies should expect added scrutiny from tax authorities as they switch to cloud-based computing solutions. According to the article, companies need to be aware of local tax laws, locations of servers and types of services needed in order to take advantage of local incentives or to avoid issues surrounding transfers over international or state borders.
So how will a client’s taxes be affected by cloud-based services? Although strategies exist that could temporarily benefit companies, the best option is consultation with tax experts to look at the ways in which cloud-based business will affect their taxes at the end of the fiscal year. As advocates of disaster planning, we think it’s always best to have your plan in place, whether the disaster is a tornado, earthquake, or IRS crackdown.