MEP Emilie Kornheiser, D-Brattleboro, speaks in the Statehouse in Montpelier on Tuesday, January 7th, 2020. Photo by Glenn Russell / VTDigger
Vermont House stands ready to vote this week on sweeping tax legislation that includes changes to corporate taxes and exemptions for military pensions and menstrual products.
One part of the bill, however, has been particularly criticized by the Vermont tech community: a proposed sales tax on “cloud” software and services.
The bill, p.53, would remove an exemption for software programs that are stored and accessed by users over the Internet, which would add a 6% sales tax. It would also levy the tax on cloud infrastructure services like data storage, networking, and website hosting.
Products that would be taxed under the proposal include products offered by TurboTax, Dropbox, Mailchimp, and website hosts such as Squarespace and WordPress.
“I think pretty much any online transaction or app is likely to be subject to this tax if it hasn’t already,” said Jeff Couture, executive director of the Vermont Technology Alliance, which represents 200 technology companies in the state.
The measure would raise $ 14 million in fiscal 2025, according to the Joint Tax Office.
The legislature has repeatedly considered introducing a cloud tax in recent years. In 2019 the House proposed it as a source of funding for clean water initiatives, but the Senate ultimately scrapped it.
Couture said he feared the tax would weigh on the tech sector.
“Adding a tax on the part of the economy that you really want to boost, which is the digital economy, may not seem like the best place in our view to add taxes,” said Couture.
Robbie Adler, co-founder of Faraday, a Burlington-based company, which makes consumer behavior prediction software, estimates that a levy on cloud services could cost his company $ 40,000 to $ 50,000 a year. That’s because hundreds of thousands of dollars are being spent on storing cloud data and using software.
Adler argued that not only companies would pay higher taxes. This also applies to people who use cloud services.
“Every Vermonter uses this and is taxed on it. Maybe it’s small amounts so no one is really too concerned, but again, people are pretty concerned if their gas bills are increased by 5 or 10 cents, ”Adler said. “And right now, we’re talking pennies every month for one of the many cloud software services we use online.”
Cloud taxes are not uncommon. About half of the states have some version of it. Proponents of the measure say that as the economy changes, so should tax laws.
“I think it’s really important and we talked a lot, especially during the pandemic, about how to develop a tax system that is ready for the future of our economy and not for the past,” said MP Emilie Kornheiser. D-Brattleboro, vice-chairman of the House Committee on Ways and Means, who drafted the bill.
Committee chair Janet Ancel, D-Calais, said the cloud tax would also help the state offset revenue lost by other provisions in the bill. These include changes to the corporate tax structure and the tax exemption for menstrual products.
The bill would change how the state determines tax liabilities for companies doing business in Vermont and elsewhere.
Corporate taxes are currently calculated based not only on the number of sales companies they have in Vermont, but also on the number of employees they hire and the real estate they own in the state. The invoice would change the code so that a company’s tax charge is based only on its in-state sales.
Ancel said the proposed changes would remove a penalty for companies that want to settle in Vermont and keep employees here.
“I think that makes us more competitive. It’s especially good for Vermont-based manufacturers who have ownership and payroll in the state. And we think it’s actually a good economic development initiative, ”said Ancel.
The change would result in a reduction in corporate tax revenue of about $ 20 million a year, the Joint Tax Office found.
When it was approved by the Senate earlier this year, page 53 was a far simpler bill. In this incarnation there was only a sales tax exemption for menstrual products. But when it reached the house, Ancel said it “made sense to use it as a vehicle” for the other proposed changes.
Legislation also now provides for an exemption from the first $ 10,000 veterans receive each year for a military retirement pension. Governor Phil Scott has repeatedly proposed such an exemption for military pensions.
S.53 also makes some other changes to corporate tax law.
Rep. Scott Beck, R-St. Johnsbury said he supports sales tax on cloud services. But he said he would prefer to narrow it down for now to only apply to software accessed through the cloud – not to transactions for storage and hosting.
“I think everyone at this point had the experience of buying software in a box and paying sales tax on it. All we are saying now is that if you access the same software through the cloud we will deal with it. It is a tangible asset and we are going to put sales tax on it, ”Beck said. “I think it’s a logical development that follows the digitization of the country, and I can easily explain that to people.”
The Middle and Middle Committee finished and voted out page 53 on Tuesday, and it is slated for a full vote in Parliament on Thursday.
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