Cloud Computing And State Sales Tax

Once a significant source of states’ revenue, the state sales tax systems in state public finance now face formidable challenges. Cloud computing brings to light the inherent flaw in a tax system. While some states have extended their sales taxes to apply to cloud computing services, others have explicitly determined that such services are not taxable. Drawing the distinction between tangible property versus service as the basis for imposing sales tax is no longer a workable framework for cloud computing services. Addressing the systemic problem of the sales tax system requires shedding this outdated paradigm. This Note examines the piecemeal efforts undertaken by states to tax remotely accessed software transactions and the underlying rationales that support these policy decisions. The Note will examine the evolving tax treatment of software transactions and categorize the different models currently used by states to impose sales tax on access to hosted software and online databases. Next, the Note will critique the theoretical foundations that underlie these different models before arriving at a theory that is more sound and satisfactory. Finally, the author recommends best practices for taxing software services by examining Washington’s model