June 16, 2014 at 6:46 am

OUR EDITORIAL

Editorial: Navigate a fix for cloud computing

Lawmakers must address some convoluted state regulations on technology before it drives away business

Michigan has made great strides the past few years to become more business friendly. But there’s more work to do, including in the realm of cloud computing.

In the tech world, the cloud generally refers to accessing computer systems of third-party providers via the Internet. Usually, it means storing and accessing data remotely.

Since software is involved, some companies have been assessed a sales tax when they contract with the Internet providers. But many contend cloud computing is a service. The difference is critical because Michigan taxes sales of goods but not services.

Proposed legislation would recognize all cloud computing as a service.

“Many states are making the determination on how to treat this new and growing technology, making it all the more important that Michigan clarify its tax intent,” says Sen. John Proos, R-St. Joseph, a primary sponsor of the two-bill package. “Taxing this service is the incorrect answer.”

Just this year, Nebraska, Mississippi, Idaho, Virginia, New York and Massachusetts all classified cloud computing as a service, thus making those states more attractive to high-tech businesses.

Two recent lawsuits have concluded that cloud computing is a service, but the state Treasury Department is not embracing these rulings. In fact, a spokesman for the department says both cases are being appealed. He also says the department believes the regulations are clear.

However, there continues to be inconsistency in assessing taxes on cloud computing.

Gregory Nowak, partner at Miller Canfield in Detroit, who represented the plaintiffs in the court cases, says he has never seen any published guidelines on the topic from Treasury and officials have granted some refunds to companies who initially paid the tax and then fought it.

That’s why Nowak says he’s advising his clients not to pay any assessments.

“The clearest policy would be to not tax these transactions,” he says.

Cloud computing will only become more prevalent, and Treasury officials should clarify the guidelines.

Of course, the state doesn’t want to give up the income from taxing cloud computing. An estimated $10 to $15 million is expected in fiscal year 2013-14. But the money pales when compared to the potential loss of revenue if businesses leave or bypass Michigan.

The two court decisions should have been enough guidance for the department. Since they weren’t, lawmakers should follow through with this legislation.

The state needs to change how it taxes cloud computing to ensure Michigan remains competitive in a high tech economy.