'The Cloud' Poses Tax Questions For Mass.

Fred Bever reported this story.

BOSTON — As consumers and businesses turn to computing in "the cloud" to store data or crunch numbers, cloud-based companies — and states — are beginning to wonder: Can you tax that? Massachusetts officials are starting to provide some answers.

First of all, just what is this cloud?

"Um... I'm not really sure what the cloud is," said Boston University student Jamie Lim Wednesday. "I think I've backed up my stuff on iCloud."

Lim is certainly not alone. But you can think of it like this: If you buy a shrink-wrapped software CD at the store, that's old-school computing. But if you download software from the Internet, store data remotely — on iCloud, for instance — or if you or use an Internet company's powerful servers to manage your data online, that's cloud computing.

For Massachusetts' top tax official, Amy Pitter, it's coming clearer.

"It’s an evolving area of the law."

Amy Pitter, state tax official

"Yeah, we know what the cloud is. It's an evolving area of the law," she said.

But these new cloud services have created confusion about when sales taxes have to be collected. Pitter recently signed a public letter that lays out the state’s policies on which cloud computing products are subject to the state's 6.25 percent sales tax, and which are services that are not taxed.

Here’s how the state is drawing an admittedly fuzzy line: Generally, if software is downloaded from a cloud server and run on the consumer's computer, it's a taxable product. If a consumer pays for access to a cloud company's software that's running on a cloud computer, it's still taxable. But if the customer uses a cloud server to run his or her own software, that's a service which is not taxed.

Maybe it's no wonder Pitter says cloud company requests for clarification are on the rise. And with more and more computing migrating to the cloud, she says, millions of dollars in state taxes are at stake throughout the country.

"And who knows what tomorrow will bring, in terms of what will be in the cloud?" she said. "And will there be any software that one downloads, or will the entire [tax] base disappear if we're not sort of flexible in being agnostic about the delivery method?"

Pitter says that if you access a free service through the cloud, no tax. Same if you simply store data remotely. So, no worries about using Dropbox or Google Docs, or iCloud.

And just so you know, state law specifically exempts digital downloads, like iTunes, from the sales tax.