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FAQ: What you need to know about cloud computing's hidden tax hit

Ellen Messmer | May 7, 2013
Cloud computing services, whether software as a service (SaaS) or infrastructure as a service (IaaS), are subject to taxes, whether your cloud provider tells you or not when you purchase them. Reid Okimoto, senior manager in the state and local tax practice at KPMG, shares tips to help you understand the real cost of cloud computing.

A: A state auditor does periodic audits of companies and they will require you to prove that sales tax was charged and paid appropriately. You may need to prove this by showing them your invoices. Also, your financial statement auditors may inquire about contingent sales or use tax liabilities on the sale or purchase of cloud services. This could result in a contingent liability being placed on the balance sheet. Another reason to keep straight on the cloud-tax issue is that when companies are sold or recapitalized, they typically go through a "due diligence" process with the buyer to "scrub" companies for all liabilities, including tax liability. If there's a lot of liability, there will be a "failed process" question.

Q: What more do business professionals need to think about here?

A: Clear guidance on taxability and sourcing of cloud services creates predictability from a business investment standpoint. States that do not provide clear guidance put cloud service providers in an awkward position, stuck between a possible state tax audit or False Claims Act allegation for under-collecting and a possible class action lawsuit for over-collecting.

 

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