Five months after the so-called “cloud computing tax” took effect, many Vermont businesses and residents don’t know if they have to pay it.
The cloud tax is a sales and use tax payable by individuals and companies who sell software or those who buy it.
A moratorium on the tax was lifted by the Legislature last session, making cloud-based software purchases taxable as of July 1. But guidelines are still being drafted by the Department of Taxes to clarify who has to pay it, and for what.
Maribeth Spellman, director of policy, outreach and legislative affairs at the Tax Department, said in the meantime, businesses should plan to comply with the law and call the department for clarification, if needed.
“It is our expectation that businesses are complying with the law and remitting the sales and use tax as applicable,” Spellman said by email. “Businesses should report the use tax on their monthly or quarterly sales tax return while individuals may report use tax on their personal income tax return.”
Spellman said Tax Commissioner Mary Peterson intends to share the draft regulations with stakeholders when they’re ready. Those include various divisions and advisory boards within the Tax Department, plus tax practitioners, certified public accountants and tax attorneys. A public comment period will follow.
State Sen. Tim Ashe. Courtesy photo.
Sen. Tim Ashe, D/P-Chittenden, chair of the Senate Finance Committee, said he hopes business leaders will be brought into the loop, too. Website developers and hosting providers, as well as online retailers, were particularly vocal about their concern and confusion surrounding the tax, he said.
“Those are industries that stand to be affected depending on how the Tax Department says it’s going to interpret the law,” Ashe said. He added that the most common refrain he hears from business leaders is that they’re not sure if the tax will affect their business or not.
Ted Adler, founder of Union Street Media in Burlington, was one of the business leaders Ashe heard from in opposition to the tax.
Adler said he knows at least two Vermont entrepreneurs who packed up their computers and moved their businesses to other states when the moratorium was lifted.
“In one of those cases, that guy was paying well over six figures in tax per year,” Adler said.
But the tax is not restricted to companies that either sell or rely on cloud-based services to run their business. Individuals are subject to the cloud tax, too.
“Tax is due on every transaction involving prewritten software in Vermont, regardless of whether the company making the sale is a Vermont company,” Spellman said.
That could include people who pay for cloud-based programs such as Adobe, Evernote or Dropbox products. Because the state of Vermont cannot require out-of-state companies to charge and remit the state sales tax, it will be up to individuals to pay the use tax on the transaction, Spellman said.
That honor system is standard operating procedure for sales and use taxes and in line with the Legislature’s expectations, according to Janet Ancel, chair of the House Ways and Means Committee.
“All our taxes are self-reported, and there’s an audit for compliance,” Ancel said. “I don’t think there’s anything in the legislation that suggested they should have treated it differently.”
Spellman said that to assess the tax’s revenue impact, estimates will be prepared by economists based on a number of factors, including correlating national figures to Vermont’s characteristics. The Joint Fiscal Office estimated before the moratorium was lifted that the state was losing about $2.3 million in revenue each year.
Once the regulations are finalized, the Tax Department will disseminate the guidelines widely, Spellman said. To date, she and Peterson have distributed a fact sheet to stakeholder groups and media outlets, and discussed the issue at speaking engagements throughout the year.
For questions about the tax, call the Tax Department at 828-2551.
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