Vermont Technology Alliance Statement on Proposed Cloud Tax
Friday, May 10, 2019
Posted by: Jeff Couture
The Vermont House has voted to recommend applying the sales tax to “prewritten software accessed remotely,” often referred to as the “cloud tax.” as a funding mechanism for the water quality services bill, S.96. The bill is currently in the Vermont Senate.
The Vermont Technology Alliance opposed this tax in the past. When first introduced in 2010, we fought to prevent an effort to collect up to five years in back sales taxes from businesses, and we worked to have the law rescinded in 2015 through Act 51. And although the tax landscape has changed in the U.S., with some states collecting this tax, we continue to believe that taxing software as a service (SaaS) is not good policy for Vermont and that it will have a negative impact on Vermont’s growing tech sector.
We have sent the following letter to Vermont state senators outlining our concerns.
Vermont Technology Alliance Concerns with Proposal to Reinstate a “Cloud Tax”
I am writing to express the strong opposition of the Vermont Technology Alliance to the proposal to rescind Act 51 and apply the sales tax to “prewritten software accessed remotely,” often referred to as the “cloud tax,” as a funding mechanism for the water quality services bill, S.96.
The Vermont Technology Alliance is a business association with a mission to support, promote, and grow technology jobs and technology businesses in Vermont. We are the voice for tech-focused businesses and organizations in the state. We have 200 members from throughout the state representing a range of successful and growing tech businesses that create high-paying jobs and bring millions of dollars of revenue into Vermont.
The Vermont Technology Alliance opposed this tax in the past. And although the tax landscape has changed in the U.S., with some states collecting this tax, we continue to believe that taxing software as a service (SaaS) is not good policy for Vermont. The Vermont Technology Alliance is concerned with this tax because of its potential negative impact on Vermont’s tech and other businesses and the perception this tax creates of Vermont as a state that is not welcoming to or supportive of tech-focused and tech-enabled businesses – the exact type of business our state wants and needs.
Here are our key concerns:
Lack of Warning, Outreach and Testimony
This policy change is happening late in the session, quickly, without warning, with no testimony and with little time for evaluation and input on what it means and its impact. This proposed change has created confusion and uncertainty in Vermont’s tech industry.
Weakens Vermont’s Tech Sector and Growth Opportunity
Vermont’s tech sector provides some of the state’s highest paying jobs and best benefits, representing an economic bright spot and opportunity for Vermont – If we encourage and enable its success and growth. A cloud computing tax is a disincentive to the growth of tech businesses and jobs in the state. New and relocating software and tech companies will view Vermont as a having a tax environment that is not friendly to technology businesses and will look for states that have more favorable tax laws. Unlike Vermont, most other states with SaaS taxes have larger, more established tech sectors. Vermont cannot afford to have another reason not to base a tech business in Vermont. Instead, Vermont should be promoting itself as a state that does not have a cloud computing tax and use it as an advantage for attracting and keeping tech businesses.
Makes Vermont a More Costly Place for Businesses that Sell and Use Software
The tax would impact the type of businesses and the remote workers Vermont is trying to attract that sell, use and depend on cloud-based software applications (and these are not just tech businesses) by increasing prices for purchasers. Some Vermont businesses may pay hundreds to thousands of dollars per month for software, and a 6% tax adds up considerably in those situations each and every month. For companies selling software, the tax creates additional costs for tracking and managing the tax. Whether selling or buying, the impact is greater on Vermont’s smaller and start-up businesses.
Creates Uncertainty for Businesses
The Legislature voted to exempt remote access to prewritten software from sales and uses taxes via Act. 51 to eliminate uncertainty associated with the tax. The repeal of Act 51 will require the Department of Taxes to define what is included and what is exempt in the taxation of remote access to software, creating once again the uncertainty and confusion that the 2015 amendment eliminated.
Creates Uncertainty for Tax Revenue
It is unclear when the tax would be collected and how much revenue would be raised. Currently, there is no Tax Department guidance on the taxation of remotely accessed software. The Department would need to issue guidance defining remotely access software and interpreting where and how the sales and use tax applies. Without this assessment, any estimates of revenue from this tax are purely speculative. In addition, the move could prompt some service providers to challenge and litigate the ruling, causing delay and additional costs to Vermont.
Potentially Reclassifies Services as Tangible Products
Virtually all software today is sold for remote access. Software and services are so intertwined that in many cases it is difficult, if not impossible to separate them. The concern is that Vermont will reclassify SaaS as a taxable tangible product. This is particularly a concern for businesses offering online legal, accounting and other software-based services.
Fairness of Taxing Tech for Water Quality
The tech sector likely has the least negative impact on water quality, but is being called on to contribute a major cost of the clean-up. There is very little, if any, connection between Vermont’s software industry and tech services businesses that this tax will hit the hardest and Vermont’s water quality issues. Vermont’s tech businesses understand the benefit of clean lakes and waterways, but for many it appears they are being asked to contribute more than their fair share.
Vermont’s tech sector and software businesses are leading revenue drivers of Vermont’s economy. Let’s not hinder their growth. We ask that you do not approve this amendment to S.96 to repeal Act. 51.