Opinion: How to fix the cloud computing tax issue

by Glen A Wright CPA The Vermont Tax Department has recently been in the press for retroactively assessing tax on software companies located in Vermont. The so called authority for assessing this tax is the Tax Departmentâ s Technical Bulletin issued in 2010. The Tax Departmentâ s practice of creating new tax laws by issuing Technical Bulletins is nothing new ‘it has been going on for years. I practiced tax accounting in Vermont for over 35 years and the Tax Department frequently promulgates new tax legislation through their so called Technical Bulletins which were affectionately referred to as â inter-office memos’by tax practitioners. The Tax Department can and should issue regulations when they feel a certain statute should be clarified. Of course, the statute must first include the authority to tax the particular item in question which it clearly does not in this case. However, the process is time consuming which requires public notice and the holding of hearings for public input. It seems this time it was much easier to just write a memo and treat it as law even though the statute provides no support.
The assessment of sales and use tax on the licensing fee to use intangible property (software) located on a remote server is the newest law put forth by the Department. The new law is particularly offensive in that it is being applied on a retroactive basis which requires companies who are assessed to go back and bill the customer for the tax or absorb the increased costs thereby directly impacting their bottom line. We all know the impact to customer relations of additional billings of sales tax on license fees paid in full in prior years. Furthermore, this latest action is another example of Vermontâ s unpredictable tax policy and begs the question of how does Vermont encourage growth in technology businesses.
I am told the Legislature has been asked to fix this problem. The Legislature canâ t fix this problem because it is their job tomakelaws notinterpretthem. The Tax Commissioner is appointed by and serves at the pleasure of the Governor. The Governor is Chief Executive Officer of the state. Therefore, it would seem the best resolution would be for the Governor to instruct the Tax Commissioner to withdraw the Technical Bulletin, draft a legislative bill to tax this intangible property and submit it to the Legislature following the prescribed process for establishing any new law.
Glen A. Wright is the former Managing Partner of KPMG LLPâ s Burlington, VT office and former member of the Vermont Business Roundtable. He currently resides in Ocala, FL.