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Taxation of cloud server implementation?

Cloud computing has spawned an entirely new subset of the IT industry, creating new jobs throughout the United States and the rest of the globe. While the market has spawned infrastructure, software and platform services among other innovations, the U.S. federal government is still left wondering how it should regulate growth - more specifically, how it should be taxed. 

Domestic difficulties
Throughout American federal history, the government has never set sales taxes on products or services before they've entered the market. There was no way for legislators to know how the economy will react to cloud infrastructure and the associated technologies that would accompany it. Just as lawmakers were befuddled by the market's shift to a service industry, authorities are left somewhat dumbfounded on how to impose an appropriate tax on the cloud. 

Sandy Weinberg, a contributor to business blog Westfair Online, explained that state officials are now developing protocols on how to treat the sale of that particular service. Typically, vendors provide customers with cloud servers that are hosted, operated and maintained by the distributor of the technology. Although this practice may fade due to an influx of graduates familiar with the service, it probably won't be feasible for companies to create their own environments for another decade. 

Currently, New Jersey defines taxable, tangible personal property to include pre-developed software delivered electronically. However, cloud computing transactions don't fit with the state's definition because hosting companies do not transfer any of the software to its customers. 

International issues
Canadian and U.S. IT industry relations remain profitable for both vendors and clients, but the taxation legislation of one country may not correspond with another. If a cloud host in Toronto wants to provide their services to a business in near-by Buffalo, the thick line between them may cause some confusion.

According to TP Week, a magazine covering international taxation laws, the U.S. federal government has implemented measures to determine how a service should be tariffed based on how income is obtained by the provider. The source cited a classification known as U.S. code §7701(e), which states that a service contract may be redefined as a lease of property if six requirements are met. 

Three of these obligations are not met by the average cloud computing transaction because the recipient of the service is not in possession of the infrastructure, nor does it control the software or have an economic interest in the property at hand. 

Obviously, correlating preexisting laws with the typical cloud storage solution proves to be a challenging endeavor. It's no doubt that state officials and federal authorities certainly have their hands full with properly identifying the service. 

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