The American Bar Association has asked the U.S. Internal Revenue Service to clarify how cloud transactions should be classified for tax purposes.

Citing the growth in cloud computing, the ABA said there is “a pressing need for guidance from tax authorities” on the characterization of cloud transactions.

“While traditional tax principles can be applied to cloud transactions, their current application is unclear,” the association’s tax section said in a document submitted to the IRS. “We suggest that [the Department of the Treasury and the IRS] issue additional guidance clarifying the application of such principles to cloud transactions.”

The Organisation for Economic Co-operation and Development in 2014 addressed the challenges of taxing digital services and facilities, finding it was unclear whether cloud transactions should be characterized as the provision of services or as rent or royalty income.

“Existing tax concepts are not on their face directly applicable to cloud computing,” the ABA said, noting that cloud services may not be analogous to traditional commercial transactions.

While software-as-a-service, for example, is “similar to a ‘typical’ software license at a high level,” the cloud services provider’s “ability to exercise control over software, the ability to update and monitor software use, and the remote location of data storage may justify reconsideration,” the ABA wrote.

The association recommended that the IRS “should generally characterize cloud transactions as services arrangements, with the exception of certain transactions that, based on the relevant facts and circumstances, would be treated as leasing transactions where physical equipment (i.e., servers) are dedicated to a user.”

“Articulation of a clear characterization rule is, in our view, critical for effective administration and enforcement of rules linked to characterization of cloud income,” it concluded.

The cloud computing industry is expected to grow from an estimated $25 billion in spending in 2011 to $38 billion this year and $173 billion in 2026.

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