A company’s tax director shouldn’t feel like the uninvited guest at the next cloud meeting. Indeed, not having the tax leader at a company’s cloud discussions early on can be costly, experts say.
In many organizations, the tax department isn’t kept up to speed on what a company’s plans are to enter a public cloud, set up a private cloud, or modify a current cloud arrangement, according to Steven Fortier, principal-in-charge of KPMG’s U.S. “tax in the cloud” initiative. “Sometimes a large organization doesn’t know what’s going on in pockets of the organization, and in other instances, tax is an afterthought in the discussion,” he says.
So what’s the harm? “If the tax department isn’t involved early, an organization can end up creating substantial risk and missing out on tax-planning opportunities,” says Fortier. A change to a company’s cloud arrangement could make it ineligible for tax benefits, in particular, or it could very easily swing the return on investment of the whole project negative, he notes. “What looks like a good investment pretax could end up into the break-even point or not a great investment aftertax.”
Since states want job growth and data-information centers to boom, Fortier says, there may be grants to entice businesses to set up or alter cloud arrangements. And tax departments would have access to a good deal more knowledge of such grants than other executives. Dozens of U.S. universities and government agencies end up partnering with corporations in developing cloud projects. Microsoft, for one, offered free access to its cloud-computing platform for certain Australian organizations for three years beginning in 2010. And in Europe last month, the European Union awarded more funds to research infrastructures that partner with businesses.
Though some states in this country are stricter than others, a tax director also can, more often than not, head off some pressing digital state-tax issues for a firm when considering cloud modifications. Most states have addressed digital tax issues surrounding nexus (in which a business’s physical presence determines tax liability) after the latest amendment of the Streamlined Sales and Use Tax Agreement this past May. The multistate agreement was set up to simplify sales and use tax administration, beginning with the first adoption in 2002 and in later amendments.
But state tax rulings continue to be as varied as the states themselves. For example, the sale of software in Missouri hosted on out-of-state servers is not subject to sales tax when accessed from an in-state location, a PricewaterhouseCoopers study noted earlier this year. In contrast, software as a service hosted on out-of-state servers is subject to tax in New York if the related software is accessed from a New York location.
To be sure, state and federal agencies are aware of the jurisdictional problems with cloud computing. The Digital Goods and Services Tax Fairness Act of 2011 was penned to prohibit state or local jurisdictions from imposing multiple taxes over the use of digital goods or services delivered or transferred electronically.
Lobbyists have also been busy trying to set the record straight, in their view, for those states that are owed back taxes on such cloud transactions. A comment letter last month from a National Conference of State Legislatures (NCSL) taskforce said the Digital Goods and Services Tax Fairness Act as drafted “could negatively impact state revenues during a time when state budgets are only now recovering from the recent recession.”
They argue that the act fails to target the problem that states are unable to collect the sales taxes they are owed on remote transactions and that “uncertainties in definitions and scope of the measure” must be resolved. An NCSL summit will address this issue in August.
Aside from jurisdictional issues, keeping a tax director in the loop on information technology decisions is especially important if different areas within an organization are moving into a cloud at various paces. “Every time there’s a technology implementation, whether it’s cloud or not, there are some tax issues that are going to be created,” KPMG’s Fortier adds. Companies that include the tax department in cloud discussions, he notes, are much better off because they begin to look at cloud computing holistically rather than in functional silos.
But just as important as the tax director is to a cloud project, the immediacy of financial data in the cloud helps tax directors and other C-suite executives do their job better. Executives at all levels are better able to have access to real-time data, adds Doug Johnson, vice president of marketing and business development at Acumatica, a McLean, Virginia-based provider of accounting software for cloud technology.
“Business owners love to be able to see the financial information (in a cloud) so they can plan for taxes,” notes Michael Silver, director of partner enablement at Acumatica. “As opposed to the CFO having to run reports after the fact, business owners are able to at least get a good snapshot of where the business is for their accountants and tax planners.”
Like other integrated software firms, Acumatica often teams up with cloud-based tax-solution provider Avalara to help move customers’ tax tables to the cloud. Avalara was formed to help minimize some of the compliance needed to adhere to state tax rules by offering a state and municipal sales tax calculator called AvaTax.