Head in the cloud, hand in your pocket

Vermont’s new tax on computer use

by Kevin Joseph Ryan

There is a legal fight brewing across the nation, which this week took focus here in Vermont. That fight is about increasing taxes, which is fairly typical. What is unusual here is that this fight is up in the clouds, and Vermont business owners are afraid they may go up in smoke as the state imposes new taxation without warning.

Dealer.com, a national leading company focused on providing computing and database solutions to automobile dealerships is based here in Vermont. The issue of the State’s new policy of implementing sales taxes on “cloud-based computing” has them so concerned that they hosted an extensive press conference Wednesday along with other prominent Vermont based-business such as My Web Grocer and Union Street Media.

The issue at hand here is about cloud-based computing, a new buzzword term which basically means that instead of downloading software and programs to your home computer or mobile device, you use the software by going online and access the program’s functions using a website. It is a far less complex idea that it at first seems. The service Carbonite, will store your data, such as photos or financial records on their computers as backup. Your e-mail is at first stored on a computer server in another location, then downloaded from or read from your computer. Both of these are examples of cloud-based computing.

In the plainest of terms, even the Internet itself is a form of “cloud-based” computing, because every time you request to see a website, you are asking a remote computer to download a website to your own, using what is known as HTML code. Old idea, new marketing term.

This new term has come abut in the past 18 months as remote computer software has increased and grown among businesses which offer services, such as banking, travel and specifically, Dealer.com here in Vermont. This past year, the State of Vermont’s Department of Taxes decided to interpret state tax law in an entirely new way, which imposed the sales tax on cloud-based services and software, and Dealer.com, among other local businesses, are none to happy with this move, which they see as unfair and an unexpected surprise. As David Stetson, CFO of Dealer.com put it at the press conference Wednesday, “Welcome to your new 6% consumption tax.”

Vermont issued Tax Bulletin #54, in September of 2010, which explained that downloading software, as opposed to purchasing software on a disk at a store, was taxable as if you had bought such software at a store out of a box. In 2011, the State further decided that sales tax could be collected on software you access remotely, even if you do not actually download it, and has actually been retroactively auditing and billing companies back to 2006 for unpaid sales tax on such products.

Critics of such a move feel that this places a chilling effect on building local business. Jerry Tarrant of my Web Grocer “…I do have concerns that they are not familiar with a very complicated issue, what they could do is create a unintentionally create a real problem…”

Others from the business community, such as David Bradbury of Vermont Centers for Emerging Technology felt the consequences could be far worse. “This is scary a real job and income killer…” He pointed out. “Maybe we should just pack our bags and move west.”

The Shumlin Administration was represented at the conference by Secretary of Administration Jeb Spaulding, who told the media that the Governor does want to allow the new policy to stand, so as not to override the Tax Department, but eventually wants the new tax stopped by the legislature.

When asked if the law could lead to consumer services on the Internet being taxed, as it appears the Administration is now taxing business software and website use, Spaulding had this to say, “Lets not install greater fear out there. I don’t know of anybody who wants to tax Facebook….” However, John Canning, of Vermont Software Developers Association noted that Vermont does have a history of taxing based on value, rather than cash exchanged, such as with automobiles. David Stetson of Dealer.com added, “The limits of [this] are unlimited.”

While Vermont waits for a resolution to this new tax issue, the issue is being debated nationwide. Tax Attorney Mike Wasser noted that much of this problem here goes back to the adoption of a multi-state Streamline Sales Tax Agreement. “Essentially, The U.S. Constitution Commerce Clause prevents states from asserting their jurisdiction to require collection of a tax from a remote seller unless that seller has a substantial presence in that state.” Wasser said. He said the new system allows a business to volunteer to agree to collect out of state sales taxes in exchange for certain liability concessions, and that the new agreement forced a change in the way Vermont collects sales tax. At the Federal level, Lamar Smith (R-Texas) has been attempting to advance new legislation that would prevent states from collecting tax on any digital goods outside of music or video, which would largely bring this issue to an end.

The outcome of this issue is unclear at this time, given the ever changing nature of software and the internet. Business fears uncertainly, and uncertainty in regulatory and tax compliance most of all. There is no doubt that expensive and confusing policy causes business to avoid expansion and job creation, and cloud-based sales taxation needs to be resolved quickly. However, while we ponder the future of where this tax is going, we might also wonder why small Mom & Pop businesses are going the way of the dinosaur. The State of Vermont, once again, has its head in the clouds, and it’s hand in your pockets.

One thought on “Head in the cloud, hand in your pocket

  1. Dealer.com is located in Burlington where there is an xtra local option tax, does this mean their cloud computing tax is 7%?

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