Pennies from heaven? States look to cloud-based computing for tax revenues as old sources evaporate or move online.

AuthorWeiss, Suzanne
PositionTAX POLICY

More and more of what we do every day through our computers and smartphones takes place in "the cloud"--vast networks of servers that allow us to store, manage and process data remotely, via the Internet.

A growing range &activities takes us in and out of the cloud all day long. When we sync our iPhones, search Google apps and maps, read our e-mail, create a photobook on Shutterfly, download a movie from Netflix, withdraw cash from an ATM, or network on Facebook, Twitter or LinkedIn, to name a few, we are using the cloud.

At the same time, an increasing number of businesses, from small startups to large corporations, are shifting to cloud-based computing as a way of cutting costs and improving efficiency. Technological advances have created a wave of computing capabilities delivered as a service, and vendors are competing intensely to match the needs of different customers.

Cloud computing offers businesses on-demand software, storage, processing and other fundamental computing capabilities that can be purchased in units rather than requiring a large, upfront capital investment. In many cases, the use of the cloud has allowed businesses to eliminate the expense of maintaining an in-house IT department.

Roughly half of the nation's businesses are now using one or more cloud-based services, according to Forbes magazine. And a recent report by Forrester Research predicted the global market for cloud-based services will increase from an estimated $50 billion this year to $240 billion by 2020.

The Tax Temptation

With so many business transactions being conducted through the cloud, small wonder that cash-strapped state governments are now looking closely at this rapidly developing market as a potential source of revenue.

"The thing that is being called cloud computing, while we've been doing pieces of it for some years, is now looking to be a new business model in a large way, and it affects every tax type you've got," says Verenda Smith, director of administration and policy at the Federation of Tax Administrators, a Washington, D.C., group that represents state revenue departments.

Cloud computing is just the latest technological trend, however, to expose the deficiencies of 20th-century state sales tax systems created to generate revenue from face-to-face exchanges of tangible goods that are now being replaced by digital, downloadable products.

Online shopping has grown into a $226 billion-a-year business. Technically, consumers are supposed to pay taxes on out-of-state or online purchases many states require them to disclose such purchases on their tax return forms. But most people don't.

In 2012 alone, states lost out on a collective $23 billion as a result of not being...

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