Most professional services aren’t subject to state sales tax. But some states are now casting their nets to tax online services that use computing to deliver their otherwise nontaxable service. As a result, CFOs of online service businesses need to be wary that some states might say their services are taxable as a cloud-based or data processing service.
The rapid advance of technology is colliding with states’ need to replace tax revenues lost because of e-commerce sales. A new strategy is thus emerging whereby services that have never been subject to sales tax become taxable if they’re provided through a computing platform. Proponents of the strategy argue that the use of a computing platform is tantamount to buying taxable software or data processing tools. In doing so, state tax agencies are – ironically– using the advance of cloud technology to make up for lost sales tax revenue that have resulted from the rise of e-commerce.
This trend should concern companies that provide services through the cloud because these vendors would be primarily liable for the tax. But the CFOs of such companies should also be worried about their customers, who would be liable if their online service vendors don’t collect the tax from them. Finance chiefs should review such online service arrangements to find out if their companies might have exposure and, if so, what steps might be taken to limit the risk.