Raimondo eyes tax on cloud-based services

(Corrected at 11:25 a.m. to replace T-shirt reference in 11th paragraph with microwave.)

Does your business use Office 365? Do you pay for TurboTax’s cloud-based services to prepare your taxes?

If so, your costs could rise slightly next fiscal year in Rhode Island, as Gov. Gina M. Raimondo has proposed a sales and use tax on purchases of such cloud-based services. The tax is expected to generate $4.8 million during the upcoming fiscal year and grow to about $7 million by fiscal 2023, according to the R.I. Office of Revenue Analysis.

“The governor’s proposal would tax software as a service, allowing for consistent taxation of the use of software regardless of the deliver-consumption method,” said Neena Savage, administrator of the R.I. Division of Taxation.

- Advertisement -

The proposal comes as part of Raimondo’s $9.4 billion fiscal 2019 budget, which was introduced on Jan. 18. The first-term governor, in an election year, faces a glaring $60 million deficit in the current fiscal year and a projected $200 million deficit in fiscal 2019.

“This is a difficult budget environment,” said Michael DiBiase, director of the R.I. Department of Administration, when the budget was first introduced. “It wasn’t an easy budget.”

Raimondo has proposed a handful of additional new revenue sources she hopes will help close the deficit. The more-tangible proposals include sports betting, the expansion of medical-marijuana compassion centers and applying the 7 percent sales tax on purchases of armored cars and security services.

The sales tax on cloud-based services, meanwhile, is more nuanced. The taxed services would include the purchase of such services as Office 365, Google Apps, Salesforce.com, Citrix GoToMeeting and Cisco WebEx. The services are known formally as “Software as a Service,” or SaaS.

SaaS companies offer customers services through a website rather than through downloaded or physical software. The latter is considered tangible property and the discrepancy makes all the difference to the R.I. Department of Revenue.

“Traditionally, computer software was delivered on a computer disc or was downloaded onto the consumer’s computer and thus was taxed as tangible personal property,” according to the DOR. “SaaS allows for a vendor to retain the software and instead the end user pays for the use of that software,” thus avoiding the tax.

On balance, tax revenue generated from SaaS would account for only a fraction of total revenue generated for the state. But because it targets transactions made largely with out-of-state companies, it signals Rhode Island wants to build off a decision made last year to require remote online retailers, such as Amazon.com Inc., to collect and remit online sales tax.

The collection of online sales taxes has been a thorny issue for states since the emergence of online shopping. And it’s only gotten more complicated as more and more companies offer business online. While there’s little dispute over sales tax on the purchase of a microwave at the Warwick Mall, a similar transaction online is less clear.

For example, if a Rhode Islander buys a microwave online from a retailer based in Connecticut, should it be taxed? If so, which state’s sales tax should be applied, and which state should collect?

The question is still being answered in states throughout the country, but the General Assembly tried to move the issue ahead last year and passed legislation requiring entities – including those without a physical presence in Rhode Island – to collect and remit online sales tax.

Enforcing and tracking such requirements is admittedly difficult for state regulators.

“We cannot characterize compliance because the number of companies that could fall under the law is unknown,” wrote Paul E. Grimaldi, DOR spokesman, in an email.

‘The governor’s proposal would … [allow] for consistent taxation of the use of software.’
NEENA SAVAGE, R.I. Division of Taxation administrator

The DOR will not comment on any individual taxpayer, but the new law undoubtedly received a boost from Amazon after the online retail giant announced last year it would willingly start collecting and remitting the online sales tax in Rhode Island.

DOR is wary to herald any success, as the new law only officially took effect in August, but initial results have exceeded expectations.

“We are seeing enhanced filing and remitting, and consumers are receiving notices based on the calls to the tax division,” Grimaldi added.

Indeed, the tax department estimates the sales tax collection from remote sellers – which includes Amazon – totaled $15.2 million from July through October last year. That’s more than triple the $4.3 million remitted during the same period a year earlier, and 78.8 percent more than what the state projected ($8.5 million).

The number could continue to grow, too, as online shopping continues to gain traction with consumers and the number of companies willing to comply could increase.

By taxing SaaS companies, Rhode Island could potentially augment such revenue. How effective that effort will play out, however, depends on the passage of Raimondo’s budget and the compliance of businesses and consumers.

“The [tax] … would bring the sales tax base in alignment with our neighboring states in New England and provide consistent taxation of software regardless of the consumption and delivery method to the end user,” according to DOR.

­Eli Sherman is a PBN staff writer. Email him at Sherman@PBN.com, or follow him on Twitter @Eli_Sherman.

1 COMMENT

  1. Worse than tax and spend is spend and tax. Shortfall after shortfall makes politicians tax everything that moves.
    This is one more tax on something that the state feels is innocuous but the sum of this annual drive to find new taxes keeps the state from recruiting workers and companies — unless you give them a “special deal” tax break. All the politicians say they want to foster more jobs in RI but then they do this sort of stuff that proves it is not high on their list.