Clouds continue to gather over tax

Opposition to tax on internet based “cloud” services grows

by Rob Roper

In just a matter of days, the Vermont-based Facebook group, Stop the Cloud Tax has accumulated almost 1800 followers with tens to a hundred or so joining each day. It’s unusual for such a complicated and wonky issue to capture the imaginations and the ire of so many members of the Vermont business community.

At issue is the government’s insistence that it has the right to taxus citizens for accessing computer software that is owned by someone else and housed on a server somewhere else – and that they’ve had the right to do this since 2006. But there are serious problems with the government’s argument:

First, “cloud services” are called “services” for a reason… and the state does not tax services. At least not yet. It used to be, to use an analogy from the Speaker of the House, Shap Smith (D-Morristown), that people bought 45 records to listen to their favorite singles, and the state could tax that. Then people started downloading songs from iTunes, and the state figured out a way to apply the sales tax that. Now people are listening to their favorite songs by subscribing to online music services, like Pandora, and, as a result, the state sees itself as losing out on big revenue. But, in short, the state still wants the money, and they aim to get it.

What the governor and the legislature do not want to do, however, is have to cast a vote on the record for a tax increase.

Mike Wasser is a state tax attorney with State Tax Services, LLC, and he served in the Vermont Tax department at the time the legislation in question regarding the cloud tax was implemented. He is also representing two businesses that are being assessed back taxes based on cloud-based business activity. “There’s incredible concern about the way this came about in Montpelier, and that’s really what we would like to see addressed this session,” said Wasser.

He explained “That interpretation [that accessing cloud based services is a taxable event] came about in 2010 through a very informal document called an ‘information bulletin’ that the tax department published. It’s not based in statute. It’s not a regulation. It’s not through the traditional rule making process, so the public had no opportunity for input. It’s not something that’s terribly visible to your average taxpayer like a law or regulation would be, and it kind of bypasses the legislative process in terms of levying a new tax. And that’s a concern for everybody involved.”

How should the situation be resolved? In Wasser’s opinion, “My first recommendation is that it be dealt with administratively because it was done in the administrative bulletin, and it can be undone in the administrative bulletin. To the extent that that’s not going to happen [the Shumlin Administration has indicated they don’t intend to go that way], and it needs to happen legislatively, what can be done is the passage of clarifying legislation just reiterating that the original taxing position on tangible personal property was never intended to reach this. At that point, then the legislature can debate this openly and honestly, and make an informed decision as to whether cloud services should be taxed going forward or not.”

Legislation has been introduced in the House that attempts to fix the problem, H.757. The bill, “proposes to impose a temporary moratorium on the enforcement of the sales tax on prewritten software that is accessed remotely,” and states, “the department of taxes shall not assess tax on charges for remotely accessed software made after December 31, 2006. Taxes paid on such charges shall be refunded upon request if within the statute of limitations and documented to the satisfaction of the commissioner.”

This would let those Vermont businesses that are currently facing large back-tax bills off the hook. However, Wasser points out a big problem with the concept of a moratorium, “It suggests that [cloud services] were originally taxable when they were not…. Tax bulletin 54 represented a policy change that had the effect of creating a new tax levy, and that’s problematic because our constitutional processes require elected legislators to levy new taxes.”

This is, in large part, why Stop the Cloud Tax is gathering such momentum so quickly. “I think the business community remains frustrated by the revisionist history that’s gone on in the debate as to whether this should continue to be taxed going forward,” said Wasser. I want to clarify that when this bulletin first came out, I don’t believe it was done with any malicious intent by the tax department. It’s a complicated issue as we’ve discussed… and they just got it wrong…. It’s really in how you address a mistake like that that makes a difference. What concerns me is in larger part, to my knowledge, nobody that’s looking at how to resolve this issue has even bothered to consult the former tax commissioners who actually administered this policy. Why aren’t they asking commissioner Pelham and commissioner Westman what the department’s official policy was on cloud services?”

They’re not asking because they don’t want to hear the answer. They want the tax money without the responsibility at election time of having voted for a controversial tax increase. The political goal is to maintain the idea that the tax already exists so they can continue to collect it – accountability free — in the future.