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Idaho Technology by Rick Smith and Brad Frazer: Cloud computing tax will harm growing tech economy

Added by Richard G. Smith, Bradlee R. Frazer in Articles & Publications, Business Law, Intellectual Property and Patent Law, Tax Law on February 19, 2013

This article originally appeared in the Idaho Statesman’s Business Insider on February 19, 2013. Republished with permission.

For Idaho to successfully thrive in a knowledge-based economy, it must focus on growing key industries with the potential to make a significant economic impact.

The Idaho Technology Council strongly believes that business-friendly policies are a critical part of sustaining Idaho’s emerging tech sector, which contributes nearly 20 percent of Idaho’s GDP and is projected to grow as hundreds of Idaho tech companies expand. This is why it greatly concerns us, as counsel to the IT C, that the State T ax Commission has taken a position that a sales tax should be added to software services transactions.

The portion of Idaho’s tax statutes that discusses software – and that the Idaho State Tax
Commission is citing as its bedrock on this issue – was enacted in 1986, long before cloud
computing even existed. The current statutes authorize sales tax on the purchase and sale of software but do not expressly require similar taxation of cloud computing services. This is an important distinction. Cloud computing occurs when a customer pays to access software online. The customer does not manage or control the underlying cloud infrastructure, which is why cloud computing services are provided through subscription agreements, not licenses. It’s clear that cloud computing is a new business model that cannot be shoehorned into previous tax policies.

Few other services in Idaho are subject to the sales tax, and if cloud computing services are
taxed, it will create unintended consequences that will ripple throughout Idaho’s economy.
Because the State Tax Commission audits more Idaho-based companies than companies selling cloud computing services into our state, this inherently places Idaho tech companies at an unfair disadvantage. The Tax Commission’s position also creates a tremendous financial burden, because Idaho tech companies could be required to pay sales taxes on previous transactions that have taken place since the inception of their businesses. More than one member of the IT C has said that his or her company will not be able to keep doing business in Idaho unless this position by the Tax Commission is reversed.

Implementing such an unfriendly business policy will drive our companies from the state and discourage new tech companies from operating in Idaho. The state will lose income tax revenues that would be generated from these businesses and will miss out on the economic benefit of having more residents employed in high-wage positions. The policy will also harm Idaho’s ability to attract new companies and will have an adverse effect on our state’s reputation in the national and global business communities.

All of these are reasons why Idaho Technology Council members are championing proposed legislation tentatively called the Cloud Computing Clarification Act, which would clarify that certain Internet-based services are not subject to taxation. In states that have ruled cloud computing as a nontaxable transaction, strong economic growth has occurred. Kansas has seen a recent growth in revenue directly related to probusiness tax policies, which likely is due in part to its decision not to tax cloud computing services. Colorado has a booming tech community, as demonstrated by the intense tech activity in Boulder, which has one of the highest worldwide densities in entrepreneurs and tech startups.

Investing in the continued growth of job creation in the software and information-technology sectors has clearly been an economic driver for many states. However, it is even more important for Idaho, whose tech industry is still relatively young and needs to be fostered. Ultimately, the cost of taxing cloud-computing businesses in Idaho will be greater than the revenue that could be gained from such a policy.

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Smith and Frazer are attorneys with Hawley Troxell. rsmith&hawleytroxell.com; 388-4932
bfrazer@hawleytroxell.com; 388-4875