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Overcoming Cloud Accounting Tax Challenges


Cloud accounting has changed the way business is conducted, leaving state governments searching for new ways to apply sales and use tax laws or risk losing revenues. As states grapple with the best way to make up the tax dollars lost when businesses move from brick-and-mortar to an online infrastructure, tax laws may be updated and rewritten. The difficulty lies in defining new technologies within the framework of existing tax codes. These state-level changes can be difficult to keep up with and may result in inconsistencies that can lead to misapplication. Making an effort to stay informed on new cloud accounting tax laws can help businesses plan the most efficient implementation of new technology in order to limit their tax liabilities.

The challenges of cloud tax management

Before a business decides to expand operations or increase its customer base in a new state, the effects of sales-and-use taxes should be considered. Each state writes its own regulations regarding the taxation of both cloud computing providers and end users. Updates occur gradually, according to each state's own timetable. Tax industry experts Steven Krantz and Mark Nebergall, authors of a tax portfolio detailing individual states' treatment of cloud computing, believe these "changing interpretations by state tax administrators make taxation of cloud computing transactions even more challenging for both sellers and customers."

Cloud computing causes states to go beyond physical location

In the past, businesses were often subject to taxes in states where they had a physical presence, or what's known in legal terms as a nexus. With the evolution of cloud computing, businesses gain the ability to operate in many states without maintaining any sort of on-the-ground operations. Some jurisdictions have chosen to rethink the old methods of sales-and-use tax assessment and subject users to a cloud accounting tax, even when data servers or other operational facilities are located out of state.

businesses subject to taxes in states where they have a nexus

Individual states decide how to classify cloud computing

Each state generates its own definition of tax laws with regard to cloud computing and SaaS (software as a service). Some states like Tennessee treat cloud computing in the same manner as sales of traditional software programs for tax purposes. Pennsylvania states that accessing software on remote services is taxable when the end user is located within the state. Understanding how a cloud computing product is defined by individual states is essential to calculating a cloud accounting tax liability.

Many more tax changes are likely

Just because a state is not presently taxing cloud computing doesn't mean that a new law won't be enacted in the coming months or years. The idea of cloud taxation has only recently gained traction as more business rely on Internet-based services. More and more, states are realizing that their current tax laws may not reflect the current state of the business world. So there could be more cloud tax laws enacted. However, keep in mind that some of the changes may result in companies paying less in taxes. For example, in an effort to be more tech-friendly, Vermont recently repealed their cloud tax measure.

Rather than be surprised by an unexpected state sales-and-use tax liability, it's a good idea to look at existing business locations and determine potential exposure. A state tax expert can provide guidance about current exposure and future tax planning.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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