Taxing the cloud: States need to establish new legislation, Baker Institute expert says


Jeff Falk

Taxing the cloud: States need to establish new legislation, Baker Institute expert says

HOUSTON – (Sept. 3, 2019) – From Netflix to Dropbox to Google Calendar, cloud computing has not only transformed how businesses and people conduct their daily activities, it has also clouded the landscape for taxing such technological advancements.

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Joyce Beebe, a fellow in the Center for Public Finance at Rice University’s Baker Institute for Public Policy, said states need to address issues related to the taxability of digital goods through legislative actions instead of applying outdated rules. She outlined her insights in a blog post, “How Should We Tax the Cloud?” and is available to discuss the issue with the news media.

Recently, the IRS issued proposed regulations about income tax treatments for cloud computing transactions. Although many practitioners view this guidance as the Treasury Department’s attempt to block large U.S. tech-multinationals’ tax avoidance activities associated with cloud computing services, it has three major implications for all cloud computing service vendors.

The proposal identifies taxable products as streaming and access to books, music or movies in a digital format, and clarifies that a cloud transaction is either a lease of property or provision of services, not a sale of license of property. It also specifies that the location of a cloud transaction is where the consumer downloads or installs the item.

“Although the IRS still needs to clarify many details, the proposed regulation is the first guidance issued since 1998, when the Treasury addressed transactions involving computer software programs primarily sold in preloaded CDs,” Beebe wrote. “Treasury’s recent action highlights that it recognizes the importance of modernizing tax rules regarding technological advancements, and provides certainty for vendors — a good starting point.”

Further complicating the state sales tax issue is that state officials and federal legislators do not necessarily agree on who is the most appropriate authority to address the taxability of digital products or services. Before any decisive simplification measure appears, taxpayers would have to rely on sales tax automation software, reference or request state private letter rulings, or resort to litigation as the “second-best” alternatives.

“However, as digital economy continues to encompass a larger share of economic activities and more consumers are streaming or downloading digital products as opposed to purchasing them through tangible means, states are sure to expand their taxing power on cloud computing and digital products,” Beebe wrote. “A better path forward would be for states to address issues related to the taxability of digital goods through legislative actions instead of simply fitting new products and services into outdated rules.”

For more information or to schedule an interview with Beebe, contact Jeff Falk, associate director of national media relations at Rice, at or 713-348-6775.


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Related materials:


Beebe biography:

Baker Institute Center for Public Finance:

Founded in 1993, Rice University’s Baker Institute ranks among the top three university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at or on the institute’s blog,   

About Jeff Falk

Jeff Falk is director of national media relations in Rice University's Office of Public Affairs.