The cloud: there’s a tax for that

This article was authored by John Tanner, and was originally posted on telecomasia.net.

ITEM: The US city of Chicago has imposed a 9% “cloud tax” on online databases and streaming entertainment services. Chicago residents are none too happy about it, and the broader implications could be messy.

According to The Verge, the tax is essentially an extension of two existing tax laws to the digital world – one for “electronically delivered amusements” and the other “nonpossessory computer leases”:

Each one takes an existing tax law and extends it to levy an extra 9 percent tax on certain types of online services. The first ruling presumably covers streaming media services like Netflix and Spotify, while the second would cover remote database or computing platforms like Amazon Web Services or Lexis Nexis. Under the new law, what passes as $100 of server time in Springfield would cost $109 if you’re conducting it from an office in Chicago.

The Chicago government’s motives aren’t hard to figure out – it’s reportedly expecting a $12 million windfall from its cloud tax. More to the point, The Verge notes, the cloud tax is a reaction to the consumer shift from brick-and-mortar entertainment shops to digital:

Twenty years ago, the same albums and movies were consumed at video rental outlets and music stores — which paid local property taxes, potentially paired with municipal sales taxes and other brick-and-mortar duties. But as online subscription services take over more and more of our music and video budgets, that money ends up disappearing from the traditional municipal tax base. By 2015, the people of Chicago are being entertained by corporations outside of the reach of the city government, leaving it scrambling to make up the difference. Facing a severe budget shortfall, it’s easy to see how a city might look toward online services to fill the gap.

Naturally the Chicago cloud tax is generating controversy, not least among local Netflix consumers who resent having to pay more. But there’s also the question ofhow it was done (i.e. applying existing tax law rather than creating a specific law), and the potential business impacts such as added cost and complexity for online service providers, and stifled innovation from new players. Also, if your customer base is a mix of free (i.e. ad-supported) and premium subscribers, does the tax apply to everyone? And if not, will that convince paid subscribers to switch back to the free service?

The thing is, Chicago is hardly the first government to think of this. State and national governments worldwide have been worrying about the same issue for years, ever since Amazon and iTunes went big. In the US alone, the majority the states now levy taxes on digital goods like apps, games, music/video downloads, e-books and even e-cards in some cases.

Outside of the US, governments are making moves not only to tax digital sales, but impose taxes on foreign businesses (like Amazon, Netflix et al) who do business locally but pay no local taxes, putting local businesses at a disadvantage. For example, Norway has been charging a 25% tax for foreign companies selling digital services since 2011.

Out here in APAC, Japan launched a “Japanese Consumption Tax (JCT)” in April that applies to digital services and content provided by foreign service providers to purchasers located in Japan. Australia and New Zealand are looking to impose a GST on foreign-based digital download and streaming services later this year.

(Digital tax solution provider Taxamo has a list of other digital tax activities around the world here.)

With services like Netflix, HOOQ, iflix and other streaming services really starting to make headway in Asia – not to mention the general migration of just about everything to the cloud – it’s a fair bet that we’ll be seeing more of the “cloud tax”, and all of the complications therein.

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Categories: Cloud Computing · Government Regulations · Other Posts