For the very few folks in America who live in a state that doesn’t charge sales tax, traveling to the rest of the country can be something of an adjustment. With nearly every purchase, the final tally is a mystery until the sales clerk adds sales tax to the bill. Only then does this out-of-state consumer suffer post traumatic sticker shock. The same can be said of organizations that use Cloud services. Depending on the state or country where these services are actually located or the state where they’re used, the purchaser and the provider may owe the local authorities revenue from service purchases or transactions. If this doesn’t sound complicated, you’re not paying attention.

The tax implications of Cloud services can dramatically impact not just what you owe for them. They’ve got a lot to do with the choice of vendor (and how the state where they operate treats this kind of business) and it will have a lot to do with the transactions you make using the cloud. Whether or not you’re using offshore Cloud providers could also  raise the eyebrows and maybe even the ire of the tax man.

Cloud services bring a mind-boggling array of tax considerations to any organization that uses or provides them, make no mistake. Among the tax issues that could arise:
• An uncertainty about the tax implications. Many CIOs neglect to investigate the tax burden involved in a Cloud commitment. It’s only after the fact that finance digs into the impact.
• Additional scrutiny from Tax authorities. The folks who oversee state coffers, especially in states that are facing big deficits, who are becoming a lot more interested in the tax implications of the move from traditional IT service
provisioning and money they could be missing out on in this transition.

What can finance do? The first action should be to ensure that your tax experts are part of any discussions about moving services or data to the Cloud.

Much of your tax burden associated with Cloud spending and usage will depend on the service model you choose. There are three basic models:

1. Software as a Service (SaaS) — the software your organization uses is provided via the Cloud. This could be a B2B software, such as office productivity applications or accounting programs. But it could also be a B2C app, such as a game or other computer software you offer players online .
2. Platform as a Service (PaaS) — the Cloud provider hosts your business’ software on their hardware, and
3. Infrastructure as a Service (IaaS) — the servers of the Cloud provider host your data for remote storage and retrieval.

Your tax liability under each service model will be different . How you pay for your cloud services — by subscription, metering or a reserved capacity agreement — will also determine what taxes you’ll owe.

The thing that makes all this even more complex is that the tax rules that apply to all these models are changing as rapidly as Cloud technology is emerging and the use of Cloud services is exploding.

Gartner analysts believe U.S. spending on this variety of services will top $116 billion in the next six years, so it’s no surprise that state and local governments will want a taste of the action.

Finance needs to make sure it’s ahead of this very learning steep curve in technology provisioning.

There are dangers and benefits to these emerging tax rules. If you consider the fact that revenues can be earned remotely and that tax authorities don’t want to miss any possible sources of revenue, it will be important that finance have an up-to-date and clear picture of the transactions that take place in the Cloud. This will include your IP, infrastructure and the personnel that support the business.

The accounting pros at KPMG are providing an in-depth look at cloud tax issues, both the challenges and potential benefits of Cloud usage, in a free briefing paper.  It’s a good place to get an overall picture of Cloud taxing and a good source for starting a conversation with your tax experts and your CIO.

Tags: cloud computing, infrastructure, KPMG, platform, service, Software, tax