As the digital environment in which we live continues to change at speeds that were unfathomable two decades ago, archaic state tax systems have struggled to keep pace. Cloud computing is the latest innovation to introduce considerable complexity into the state and local tax system. Cloud computing is prevalent in many aspects of the user experience with companies such as Apple, Amazon, and Google now providing their traditional services via a cloud component. With three primary service models and countless transactional forms, cloud computing is difficult to fit into most current tax systems. Though some jurisdictions have begun to issue guidance on the taxability of cloud computing, it is generally limited to the Software as a Service (SaaS) model in the context of sales and use tax (which is imposed on all retail sales, leases and rentals of most goods, and taxable services). However, tax questions arise not only in the sales and use tax arena, but also in regard to income tax on a spectrum of issues such as nexus, characterization, and sourcing. The purpose of this article is to examine the primary issues facing taxpayers regarding cloud computing, from both a normative and positive perspective, in order to provide a starting point for analysis for the taxpayer, and also to give policymakers insight into the problems taxpayers face and how legislation may be formulated to bring the current tax system in line with the economic events in which it taxes.



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