If you offer cloud computing services to your customers and believe that it is a professional service, and therefore, not subject to tax, think again. The state of Michigan is currently debating a number of laws that would essentially tax “cloud computing”, or software as a service (SaaS).
While a number of states have had past experience in taxing managed services (search this site for the Florida tax issue that occurred a few years ago), the increasing popularity of cloud computing and the desire by some government entities to tax it should be of immense concern to managed service providers. Here’s why.
Managed services have for some time now been taboo from a taxation perspective. Why? Most people in the IT channel consider managed services to be synonymous with professional services, which are typically not taxed in many states. You can thank other professional services groups for this luxury. Accountants, lawyers, doctors, like keeping the government out of their services revenues. Managed services have long followed this arrangement but cloud computing could change all that.
I’m going to make a generalization that many people believe cloud computing to be very closely aligned to SaaS. Personally, I believe this to be too narrow a definition but we can debate that issue another time. However, because of this belief, there are many legislative bodies around the world that would love to have a burgeoning industry like cloud computing to tax. The problem is, not all cloud services are SaaS. There are many cloud based services that would not even involve the sale or rental of a software license. Take for example the MSP that manages a customer’s cloud environment on their behalf.
Lack of education and awareness by non-technical legislators could have devastating impacts on the managed services profession if we do not act. For MSPs who have long shied away from selling any hardware or software products, this may come as no comfort if the taxman still views your “cloud computing” offering as a taxable product.
Be advised!