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Austin TX Business Law Blog

Friday, August 14, 2015

Start-Ups & Tech Businesses Fear Impact of New “Cloud Tax”

Is it true that some areas are beginning to “tax” the Internet? 

Believe it or not, a concept known as the “cloud tax” may be on the horizon, since the city of Chicago recently enacted a surcharge to tack on an additional nine percent fee to the cost of streaming videos via Netflix or Spotify. While the notion may seem far-fetched, web-based start-ups ought to be mindful of the developments in these laws, as Chicago lawmakers assert that the tax is actually not a new idea – just an expansion of current tax laws long since on the books. 

The “cloud tax” assesses the fee to any cloud-based services, and is considered a combination and expansion of both the Personal Property Lease Transaction Tax and the Amusement Tax. While the lawmakers do not seem to have any difficulty applying these taxes to streaming videos, both were historically enacted to generate revenue from the sale of tickets to concerts or sporting events – not individual viewership of movies or entertainment. 

Under the Chicago law, the cloud tax would apply to all streaming services, as well as cloud-based services including the Multiple Listing Services (MLS) utilized by realtors. 

The Chamber of Commerce has remarked that this approach is akin to “nickel and diming” businesses and consumers.  However, the move is calculated to bring in $12 million to the city. 

On the flip side, the city says that it intended to enact the tax in order to “bring companies using new technology in line with brick-and-mortar businesses. The city also promised exemptions for tech startups based on their revenue.”

The Texas Comptroller issued a ruling on Internet taxation in 2012, holding that certain highly-nuanced cloud-based transactions may be subject to the “statutory definition of taxable data processing services, telecommunications services and information services.” It remarked that “[a]ccording to the Comptroller, the virtual/cloud computing environment service is taxable as a data processing service. The definition of "data processing services" includes computerized data and information storage or manipulation as well as use of computer time for data processing. Again, the first 20 percent of the charge is exempt.”

If you are considering a tech start-up and would like to discuss the tax implications of this type of business in Texas, please contact the Austin business law attorneys at The Kumar Law Firm right away: (512) 960-3808. 

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