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August 27, 2015

The Clouded Judgment of Tax Authorities

 

The greed of tax authorities seems limitless. Revenue agencies will often seek to extend taxes well beyond what was contemplated when legislation was enacted, in the name of securing ever more money for government. Some even go so far as to extend taxes to services even in the absence of a tax that actually includes the item or service at issue.
 
For example, Chicago recently instituted a "cloud tax," a new extension of the existing "amusement tax," and "personal property lease transaction tax" that will apply to streaming and cloud-based services. At a whopping 9 percent, the tax is expected to generate $12 million in revenue per year--or rather, innovative companies and consumers will lose $12 million every year. The Windy City's tech community has complained loudly about the impact this discriminatory tax will have on the city's innovation economy. Streaming customers and cloud-dependent technology companies have effectively been told that they are not wanted. 
 
What is the "the cloud"? Cloud computing is the storage and access of data with multiple redundant systems to ensure that the data is not lost, and access to programs over the Internet rather than on a local hard drive. In other words, the cloud is remote access and storage, and is simply a metaphor for the Internet.
 
But why the seemingly sudden interest in taxing "the cloud"? As reported in the Wall Street Journal, "With sales of DVDs, video games and traditional packaged software slumping for years, more state and local governments are eyeing technologies such as streaming video subscriptions and cloud computing to help make up for hundreds of millions of dollars or more in lost revenue. Applying age-old sales taxes to the era of new media hasn't been simple. States have long taxed tangible goods, but the broad array of new digital products often don't fit the category. Some states are trying to use existing laws, while others are taking on the politically thorny task of rewriting tax rules.Last month, Tennessee extended its 7 percent sales tax to software and digital games that are accessed remotely."
 
On the other hand, other states have taken more care. "Alabama lawmakers recently shelved its own 'Netflix tax' after months of study, and Vermont ended an effort to levy taxes on cloud computing after finding the technology was more akin to a service than a tangible good."
 
Tax authorities risk curtailing innovation in their zeal to guarantee that nothing happens without government muscling in and taking its cut. Innovation should be free to advance without being encumbered with discriminatory regulation or taxation. Innovation punished is innovation slowed, and as the cost of technology becomes more expensive through additional taxation, adoption will slow, as will the potential for job creation and increased productivity.


 

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