Don't tax the cloud!

Whether or not taxes are coming to a cloud near you, the uncertainty could slow cloud adoption and blur business cases

My good friend Joe McKendrick cites a recent survey of tax professionals at KPMG that concludes, frustratingly, that the "cloud is still so new that there still needs to be homework done on what may or may not be taxed." This kind of vagueness drives me nuts. Worse, it fosters a huge sense of financial uncertainty -- one most tech geeks don't even know exists -- around using cloud computing at all.

There are lots of opinions about whether the government has the authority to tax cloud computing. But there are no hard-and-fast laws, regulations, or court precedents to provide definitive answers as to whether cloud services can be taxed and, if so, what kind and for how much. If you're looking to deploy or use cloud computing, you could very well get a surprise tax bill or tax-based price increase at some point -- or not.

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The cloud is not new, so why is this issue getting attention now? The reason: In the United States, there's a growing movement to tax services, not just the sale of physical goods, as government coffers at all levels have shrunk. Cloud computing could easily fall into the services category.

The taxation question has a profound effect on the business case for cloud computing. Today, your business plan might show a 20 percent savings over a five-year period by using public cloud computing. But taxes could wipe out that savings and your business justification, in which case you're better off keeping your data and compute cycles on premises.

I say "could" because the potential cloud services tax rate is unknown, as are which services might be taxable. The tax cost could be anywhere from trivial to obscene, if it materializes at all.

Back in the 1990s, the federal government placed a moratorium on taxing the emerging world of Web-based commerce (e-commerce). This let the new industry grow without having government's snout in the transaction trough. This year, states have all but ended that tax exemption, as e-commerce has become simply another form of sales, so its tax exemption created a tilted playing field against merchants with physical stores.

I ask that the feds create a tax moratorium for the cloud so that it can grow more quickly. Let's keep the cloud tax-free for a few years to encourage progress in cloud adoption.

This article, "Don't tax the cloud!," originally appeared at Read more of David Linthicum's Cloud Computing blog and track the latest developments in cloud computing at For the latest business technology news, follow on Twitter.

Copyright © 2012 IDG Communications, Inc.

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