In the Wake of Shortfall, Massachusetts Governor Proposes Cloud Tax

As states face budget shortfalls during times of economic uncertainty, the pressure is mounting for them to fill the gaps with tax revenue from new sources. State governors are getting more resourceful in looking for additional revenue and one of those sources of creativity they are tapping into is cloud computing.

For example, Massachusetts Gov. Deval Patrick’s fiscal 2014 plan includes boosting state spending by $1.9 billion. To pay for the increase, Deval has discussed raising the income tax, lowering the sales tax, adding a 15-cent tax on a gallon of gas – all of these have been part of the public discussion on the governor’s ambitious plan to finance new transportation and education spending, WBUR reported.

“The governor’s proposal would tax, for example, a yoga studio’s custom website. It would also tax backing up data on the cloud, but not music and e-books,” according to the report. “The largest portion of the new tax would be collected from specialized business software services – a fast-growing part of the state and national economies.”

But the new tax could induce businesses that make or buy custom software to move those operations elsewhere, according to Jim Klocke of the Greater Boston Chamber of Commerce.

“Computer services is among the most portable of industries; it’s also one among the most important and well-paid of industries,” Klocke told WBUR. “So we want it to grow and stay here and we’ll want to be very careful about that tax burden we’re going to place on that industry.”

A majority of states will attempt to extract tax revenue from cloud-based services, either through rulemakings involving the current statutory scheme or through the implementation of legislation specifically targeting cloud-based services, according to Jonathan S. Marashlian, the managing partner at Marashlian & Donahue, LLC, a Washington, D.C.-area law firm specializing in telecom and technology matters.

“Similarly, cloud-based providers cannot hope to avoid taxation on the notion that they lack a “physical” platform that can be linked to a particular state. This is especially true for providers of cloud-based communications solutions,” Marashlian said.

So far, Idaho, Arizona, Indiana, New York, Texas and Washington have adopted various approaches to apply sales tax to cloud services.