The Vermont House is poised to vote this week on a sprawling tax bill that includes changes to corporate taxes and exemptions for military pensions and menstrual products.
But one section of the bill is drawing particular criticism from Vermont’s tech sector: a proposed sales tax on “cloud” software and services.
The bill, S.53, would remove an exemption for software programs stored and accessed by users over the internet, thereby levying a 6% sales tax. It would also impose the tax on cloud “infrastructure” services, such as data storage, networking and website hosting.
Among the products that would be taxed under the proposal are those offered by TurboTax, Dropbox, Mailchimp, and website hosts such as Squarespace and WordPress.
“I think pretty much any online transaction or app will likely fall under this tax if they don’t already,” said Jeff Couture, executive director of the Vermont Technology Alliance, which represents 200 tech companies in the state.
The measure would raise $14 million in fiscal year 2025, according to the Joint Fiscal Office.
The Legislature has repeatedly considered imposing a cloud tax in recent years. In 2019, the House pitched it as a funding source for clean water initiatives, but the Senate ultimately scrapped it.
Couture said he’s concerned the tax would be a burden on the tech sector.
“Adding a tax on the part of the economy you really want to encourage, which is the digital economy, seems to be maybe not the best place, from our point of view, to expand taxes,” Couture said.
Robbie Adler, co-founder of Burlington-based Faraday, which produces consumer behavior prediction software, estimates a levy on cloud services could cost his company $40,000-$50,000 a year. That’s because it spends hundreds of thousands of dollars on cloud data storage and software use.
Adler argued that businesses would not be the only ones paying higher taxes. So would individuals who use cloud services.
“Every Vermonter uses this and will be taxed on this. Maybe it’s small amounts, so no one really is too concerned, but again people get pretty concerned if there’s a 5-cent or 10-cent increase in their gas bill,” Adler said. “And right now we’re talking about every month, a few pennies here for any of the many cloud software services we use online.”
Cloud taxes are not uncommon. About half of the states have a version of them. Proponents of the measure say that as the economy changes, the tax code should change along with it.
“I think it’s really important and we’ve been talking a lot, especially during the pandemic, about how we need to develop a tax system that is ready for the future of our economy and not the past,” said Rep. Emilie Kornheiser, D-Brattleboro, vice chair of the House Committee on Ways and Means, which crafted the bill.
Rep. Janet Ancel, D-Calais, who chairs the committee, said the cloud tax would also help the state make up for revenue lost due to other provisions in the bill. Those include changes to corporate taxes structure and the tax exemption on menstrual products.
The bill would change how the state determines tax liabilities for corporations that operate in Vermont and elsewhere.
Corporate taxes currently are calculated not only by considering the amount of sales corporations generate in Vermont, but also by how many employees they hire and the property they own in the state. The bill would change the code so that a company’s tax burden would only be based on its in-state sales.
Ancel said the proposed changes would remove a penalty for businesses that want to locate in Vermont and keep employees here.
“I think it makes us more competitive. It’s good particularly for Vermont-based manufacturers who have property and payroll in the state. And we think it’s actually a good economic development initiative,” Ancel said.
The change would result in about $20 million dollars less in corporate tax revenue per year, the Joint Fiscal Office found.
When it was approved by the Senate earlier this year, S.53 was a far simpler bill. In that incarnation, it only included a sales tax exemption for menstrual products. But when it reached the House, Ancel said it “made sense to use it as a vehicle” for the other proposed changes.
The legislation now also includes an exemption on the first $10,000 veterans receive in military retirement pay each year. Gov. Phil Scott has repeatedly proposed such an exemption for military pensions.
S.53 also makes several other changes to corporate tax law.
Rep. Scott Beck, R-St. Johnsbury, said he supports the sales tax on cloud services. But he said he would prefer it to be narrowed, for now, to apply only to software accessed through the cloud — not transactions for storage and hosting.
“I think everybody at this point has had the experience of purchasing software in a box and paying sales tax on it … All we’re saying now is that if you’re accessing that same software through the cloud, we’re going to treat it as a tangible good, and we’re gonna put sales tax on it,” Beck said. “I think it’s a logical progression that follows the digitization of the country, and I can explain that to people easily.”
The ways and means committee finalized and voted out S.53 Tuesday, and it is due for a full vote on the House floor Thursday.
Read the story on VTDigger here: Tech sector criticizes ‘cloud tax’ in House bill.
