United States

Would you take a 13-1 long shot on the taxation of digital goods?


Last weekend, a colt named Cloud Computing won the 142nd Preakness Stakes in Kentucky…at a 13-1 long shot. Cloud Computing earned $900,000 for the win, and a single $2 bet would have earned $28.80—not too shabby and far exceeding the performance of my portfolio.

Unfortunately, the same risk/reward scenarios rarely exist when it comes to getting the taxation of digital goods and services right. Every day, businesses are transitioning to cloud-based environments. Purchases of cloud services have increased dramatically as well as sales of cloud services and digital goods. Cloud computing swept the business world so quickly that states are still trying to keep pace with tax laws to match at least 10 years into the technological transformation.

Determining whether sales or income taxes apply to software or services that you cannot hold in your hand, and yet may still be considered tangible personal property is just the tip of the digital goods iceberg.

  • What is SaaS, PaaS, and IaaS and have I unknowingly provided those to my customers?
  • Has my business established nexus through cloud computing?
  • How do I characterize a digital product or cloud service and where should the sale be sourced?
  • And is it worth the risk of not asking these questions until they are asked for you by an auditor?

The final furlongs of spring are slowly eclipsing and a long hot summer awaits. Staying current on the myriad of state and local tax laws that cover digital goods and cloud computing does not necessarily mean the constant jockeying of limited resources. It does mean staying aware of new technologies and products deployed by your business, understanding your state tax positions, knowing where your employees are located and taking a proactive rather than a reactive approach to the taxation of the cloud.

Your odds may have been pretty good so far, but I would not mention that to the 8th-placed Always Dreaming—the Kentucky Derby winner that was heavily favored to capture the Preakness and continue the hunt for the Triple Crown. 

Mo Bell-Jacobs

Senior Manager

Mo examines state and local tax issues and the impact of legislation on middle market companies. Contact him at mo.bell-jacobs@rsmus.com.

Areas of focus: State and Local TaxWashington National Tax

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