Thinking Out Cloud: Cloud Computing Law


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Tagged channel managers , channel partners , enablement , sales , sellecom , selling. I recently became a fan of Hamilton, the Broadway musical. From it, I learned that Alexander Hamilton was one of 3 authors of the Federalist Papers, something I vaguely recalled from history class years ago. The musical said three people agreed to write 25 articles about the new U. Funambol is excited to announce an important update of its market-leading OneMediaHub white-label personal cloud. The author, Farhad Manjoo, listed several examples of how the "big 5" Google, Apple, Facebook, Amazon, Microsoft , who increasingly dominate daily life globally, embody principles in their products that can conflict with the beliefs, laws and politics in many countries.

Governments, businesses and people in those countries often feel they have little-to-no recourse, resulting in a backlash against the big 5. It is normal to assume it's OTTs, as the sheer volume of news about them dwarfs operator clouds. On a personal level, when's the last time you heard someone say, "I was using the XYZ [operator] cloud"?

Two large mobile operators recently shared research that showed that their personal clouds significantly reduced churn. This post delves into the dynamics of how operator clouds do this.

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Let's start with a description of an operator cloud so we are on the same proverbial page. An operator cloud stores important content from a user's phone - their contacts, photos, videos, music, files and calendar - in the user's personal cloud account. The article had a chart about information that adults consider to be the most sensitive and said that much of the content on Facebook lines up with this, including phone conversations, text messages and their location.

For research professionals and blogging the mantra is 'publish or perish'. Adapted for mobile operators, new research indicates that the mantra should be 'provide a personal cloud or perish'. It turns out that personal clouds are truly the best thing to happen to mobile operators for customer retention since 'fill-in-the-blank' sliced bread, ice cubes or your favorite invention cliche. In the past month, two major mobile operators have shared primary research with my company that shows that their personal cloud has reduced their churn much more than expected.

Several news items in the past few days could impact personal clouds profoundly - without further ado:. The charges stemmed from Google offering favorable financial terms to providers that allowed Google's services and apps, such as Search, to dominate Android devices. The charges are reminiscent of the anti-trust action against Microsoft for favoring Internet Explorer IE at the expense of other browsers, which resulted in IE becoming decoupled as the de facto browser on Windows and which opened the door for other browsers ironically, leading to the rapid rise of Google Chrome.

All consumer clouds have strengths and weaknesses. Why use a confusing cloud that mainly supports one brand of devices? Vice President of Worldwide Marketing at Funambol. This Comment will address only the threshold issue of the taxability of cloud computing transactions, and the California state tax implications thereof. Part I consists of a brief survey of current California sales and use tax law, and provides context for the subsequent sections and discussion.

Part II provides a history of computing and networking, and discusses the trend towards cloud-based computing models. Part III introduces and explains the phenomenon of e-commerce—a jumping off point for the discussion of taxation of cloud computing transactions—as well as federal and state responses to Internet taxation issues in a sales and use tax context.

Use tax is imposed on consumers as a percentage of the sales price of tangible personal property stored, used, or consumed in California.

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Prior to this writing, California imposed a 7. While cloud computing is a relatively new phenomenon, one must grasp the evolution of computing and networking to fully understand its importance and the rather fundamental shift in computing it may represent. Due to the architecture and limited processing power, no two users could access the same data on the mainframe simultaneously.

In , an engineer at the Stanford Research Institute, Douglas Engelbart, introduced the mouse, word processing, collaborative documents and more, in the context of an easy to understand graphical user interface GUI. Seven years later, Bill Gates and Paul Allen founded a company called Micro-Soft, and began writing software for the newly invented personal computer PC. The PC soon supplanted the mainframe as the center of corporate computing, and allowed individual users to install applications and store data on their own equipment. For the first time, the value of desktop PCs sold in the United States surpassed sales of mainframe machines.

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Most recently, Congress extended the tax moratorium until November 1, Cloud computing denotes a significant shift in the method by which we store information and run applications. Who provides the most personal clouds worldwide? While services and goods will continue to be distributed via traditional models, many business and consumer items—such as movies, books, software, music, and news—are and will become more easily deliverable over the Internet. Established guidelines will provide the certainty and stability necessary to incentivize cloud-based business in the state, and streamline the tax collection and remittance process. Part I consists of a brief survey of current California sales and use tax law, and provides context for the subsequent sections and discussion.

Business organizations summarily moved away from a single mainframe model, and embraced a network of many PCs that everyone could use. PC users began to interconnect through private, internal networks to communicate with co-workers. Subscription services like CompuServe— which initially offered its services only in corporate contexts—America OnLine AOL , and Prodigy soon offered up their own self-contained networks for home use.

The World Wide Web appeared in , and offered integration of individual networks via the Internet. In light of the increased popularity and prevalence of the web in the mids, these services eventually offered their subscribers a connection to the vast array of content on the web. By , more than fifty-six million Americans could access the Internet at home, work, or school.

Cloud computing denotes a significant shift in the method by which we store information and run applications. While many have proffered definitions of cloud computing, the concept is as hazy as its name connotes. Cloud computing services vary considerably and include data storage sites, health record sites, social networking sites, and many more. Any information a user may store locally on a computer may also be stored in a cloud.

Among the major players precipitating the shift towards a broad model of cloud computing is Google. Another key example of a company seeking to capitalize on the shift is Amazon. Over the past eight years, Amazon has constructed a vast cloud computing platform that hosts its own web operations, as well as operations for a number of massive Internet companies.

As a content provider, Amazon maintains a cloud-centric perspective in which streamed not downloaded content is more important than hardware. In essence, a customer may purchase a scalable virtual environment in which to operate its business or maintain its web presence, and may increase or decrease computing and server capacity depending on needs.

Additional examples are numerous, and suggest that the transition in computing is more than a mere fad.

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Based on historical trends and the growing ubiquity of the Internet, cloud-based services and data clearly represent the next step in the evolution of computing. The rather complex nature of the goods and services that cloud companies provide, however, poses some rather thorny sales taxation problems. As the world has shifted from a manufacturing-based economy towards a more service-based economy facilitated by Internet transactions, governments have struggled to keep regulatory pace.

From to , e-commerce increased While services and goods will continue to be distributed via traditional models, many business and consumer items—such as movies, books, software, music, and news—are and will become more easily deliverable over the Internet. In , Congress—in an attempt to address Internet taxation—formed a bipartisan Congressional Internet Caucus. Most recently, Congress extended the tax moratorium until November 1, State governments rely on sales and use taxes for approximately one-third of their total tax revenue.

Currently, forty-five states and the District of Columbia impose such sales taxes. Rather, consumers must remit use taxes to the appropriate taxing jurisdiction for the use of the purchased product, though compliance with the requirement is low. Sales and use taxes, as discussed earlier, are mutually exclusive but complementary.

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Whether state governments can tax Internet sales impacts not only government tax revenue, but also the business operations of brick-and-mortar retailers who may be forced to collect sales taxes their online competitors do not. The revenue that state sales and use taxes generate depends upon the base of the tax and the tax rate.

In addition to sales tax, most states levy income taxes to generate revenue. Unsurprisingly, of all the fifty states, Washington, Tennessee, and South Dakota rely most upon the sales tax in generating revenue. Washington has recently expanded its sales tax laws by enacting provisions that tax digital products with service-like characteristics. California ranks square in the middle of all states, relying on sales tax revenue for States without an individual income tax—Washington in particular—will likely lead the push for Internet taxation reform out of sheer necessity.

It is often difficult to determine whether cloud computing transactions are products or services of a type that are subject to state sales tax. Furthermore, such transactions often include a lease element—typically a lease of server space—which would normally be treated as a sale for the purposes of the statutory provisions governing sales and use taxes, so long as the leased property is tangible personal property. California directs its sales and use taxes primarily at tangible personal property. As the court in Roth Drugs v.

The taxing of tangible personal property as distinguished from intangible property is perfectly natural and reasonable. The reason for distinguishing between tangible and intangible property for the purpose of taxation is very evident. The first is visible, accessible, and easy to identify and levy upon, while the other is not so readily located or its value ascertained.

There is no room for logical controversy over the right to distinguish between tangible and intangible property for the purpose of taxation. While a top-level distinction between tangible and intangible property is logically defensible, a recurrent problem of taxation—as with software, for example—lies in distinguishing tangible and intangible in the first place. Sales or licenses of prewritten computer software delivered electronically, however, evoke mixed responses from states.

In Nortel Networks Inc. While the California State Board of Equalization SBOE will likely seek to construe the Nortel holding narrowly, transferors of software and intangibles in California would be well served to act cautiously, pending further guidance.

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In May of , however, the SBOE clearly indicated that the Nortel ruling will not affect the application of sales tax to typical off-the-shelf retail sales of canned software, as the typical retailer does not hold any copyrights or patent interests in the software. Software in a cloud computing context further complicates matters by incorporating strong service elements.

Some states—Indiana, Michigan, Utah, and Vermont—have found that remotely accessed software meets the definition of tangible personal property. For the most part, however, state tax laws crafted on the distinction between canned and custom software are unable to cope with categories like SaaS, Iaas, and PaaS, and instead clumsily employ the old paradigm to determine tax treatment. States take a predictably variable number of tacks. In Arizona, the imposition of a tax depends upon whether the vendor issues a license.

North Carolina likewise distinguishes between prewritten software and digital property, yet subjects both to tax. New York has issued a series of advisory opinions in which it held that ASP sales, even if delivered electronically, are licenses to use prewritten software, and therefore, taxable as tangible personal property.

The state does not, however, tax digital property—which it regards as an intangible asset not subject to tax—unless it is transferred as part of a taxable service.

These impractical distinctions that separate taxable from nontaxable software, in California and elsewhere, substantially impede the characterization of a cloud transaction. Rather than contort the existing distinction between canned and custom software to encompass a cloud service in which the taxpayer does not take physical possession of software, California should look to amend the manner in which it taxes services.

Services, Leases, and Application Interfacing. As mentioned above, cloud computing transactions often bundle together the sale of services with access to server or disk space—frequently structured through a lease—and the ability to interface with vendor applications. If, however, a service contract is a separate object of a transaction— in a mixed sale involving tangible personal property—at a readily ascertainable value, it may be treated as a distinct nontaxable transaction.

In other words, a tax may be allocated between taxable and nontaxable items bundled together if the value of the nontaxable item is separately stated. State sales taxes exclude most services from sales taxation for largely historical and political—as opposed to fiscal—reasons. States have gradually expanded the sales tax base to reach a number of services.

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California taxes comparatively few services in relation to other states. If California were to include the retail sale of services—along with the retail sale of tangible property—in the sales tax base, many of the complex legal controversies borne by the retail sales tax would cease to be. As a matter of retail sales tax policy, there is no sense in separating two inextricably intertwined aspects of a transaction, each of which amounts to personal consumption. A number of states currently tax services that bear upon cloud transactions. In a private letter ruling, the Utah Tax Commission addressed the taxability of remote data and information hosting services provided by a company with servers in Utah.

A number of states have recognized that their statutes and regulations are ill-equipped to deal with changing technology and have begun to address cloud computing. Louisiana, for example, recently organized a working group to address—or attempt to address—the issue. Illinois, instead of issuing a letter ruling on a cloud computing issue, called for new regulations on the matter.

In California, a number of committees and government officials have recently proposed legislation and initiatives to address some of the issues as well, several of which are discussed below. Perhaps no state, however, has led the field in taxing both digital goods and services so much as Washington. While California, unlike Washington, may continue to rely on revenue generated by its state income tax, the ongoing transition to a service-based economy demands action sooner than later. In essence, the member states seek to simplify and better synchronize individual state sales and use tax laws, particularly when it comes to business conducted over the Internet.

An interstate accord under the SSUTA need not successfully resolve all the characterization problems of cloud computing transactions. It would, however, contribute immensely to the tenor of national sales and use tax reform efforts. If every state, including California, were to actively participate, open the channels of dialogue, and foster such a collaborative undertaking, Congress would be better situated to take unifying action—with consent from the states—at the federal level.

If California were to join the SSTP as a member state, it would still retain the power to decide what is taxable and what is exempt, though the California State Legislature would have to conform to the definitions set forth in the SSUTA. Finally, while the SSUTA represents a promising vehicle for national sales and use tax reform, it must itself address cloud computing more explicitly.

Over the same period, California has relied increasingly on highly volatile income taxes. In essence, it seeks to extend sales taxes to services while simplifying and cutting income tax rates. To address the problem, the committee proposes that California tax all business and consumer services at a rate of Among its other proposals, it would also lower the sales tax on goods to 4. Lamar Smith of Texas recently sponsored H. Essentially, it would require that cloud computing be taxed as a service. If states chose to tax the service, they would first need to enact legislation deeming it taxable and propound a clear definition for taxability purposes.

While the proposed legislation sets out a potentially problematic sourcing regime beyond the scope of this discussion, it nonetheless represents a proactive effort to address some policy issues around cloud computing and a progressive stance on the taxation of services. Clearly, the law is unable to keep pace with technological innovation. Rather, the state should tax digital goods and services pursuant to state legislation. It can ill afford to ascribe to a long-term policy of reliance on interpretive decisions by revenue agencies as to what constitutes a taxable cloud transaction.

Furthermore, California ought to focus its energies on amending the manner in which it taxes services. California must develop clear policies regarding SaaS and digital services, for example, and think more progressively in generating its tax policy on such novel issues. It must also propound guidelines to service providers and their customers—on whom the state cannot rely to characterize their own transactions—as the fact-specific inquiries of case-by-case determinations will amount to a drain on precious state resources.

Finally, California should look to open lines of communication with revenue departments in other states, virtually all of which are facing the same difficulties. Without some nominal consensus among the several states, Congress is unlikely to interpose itself substantially.

Federal guidance and policymaking assistance, however, would prove invaluable, particularly as states face dire budget crunches. The explosive growth of the Internet and the increasing number of Internet users around the world suggest that the current trend toward cloud-based services and data in a global marketplace will persist.

If America wishes to keep pace as a breeding ground for technology and innovation, it absolutely must provide its businesses—both large and small—with clear guidance on issues of taxation. The Emergence of Cloud Computing While cloud computing is a relatively new phenomenon, one must grasp the evolution of computing and networking to fully understand its importance and the rather fundamental shift in computing it may represent. The Transition to a Service-Based Economy As the world has shifted from a manufacturing-based economy towards a more service-based economy facilitated by Internet transactions, governments have struggled to keep regulatory pace.

Taxability of Cloud Computing Transactions Under Current California Law California directs its sales and use taxes primarily at tangible personal property. Services, Leases, and Application Interfacing As mentioned above, cloud computing transactions often bundle together the sale of services with access to server or disk space—frequently structured through a lease—and the ability to interface with vendor applications. Streamlining the Taxation of Cloud Computing Transactions Under California Law A number of states have recognized that their statutes and regulations are ill-equipped to deal with changing technology and have begun to address cloud computing.

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Conclusion Clearly, the law is unable to keep pace with technological innovation. I offer my sincere gratitude to Professor Peter van Zante for his patience in acquainting me with California sales tax law, Professor Jenny Carey for her thoughtful comments during the writing process, Debbie Lipton and the staff of the Rinker Law Library for their invaluable research assistance, and the staff of the Chapman Law Review for their excellent editorial work. Finally, I would like to dedicate this Comment to the memory of my wonderful and truly one-of-a-kind grandmother, Hilda Susson.

Brown and his fellow Democrats argue that the problem is not that the state is spending too much, but that the revenues are not enough to pay for services that most citizens want, like schools and programs for the needy. See Karl Frieden, Cybertaxation: Michael Miller, Cloud Computing: If your computer crashes, the software is still available for others to use.

THINKING OUT CLOUD: CALIFORNIA STATE SALES AND USE TAXABILITY OF CLOUD COMPUTING TRANSACTIONS

Thinking Out Cloud: Cloud Computing Law [Nicola Haughey] on linawycatuzy.gq * FREE* shipping on qualifying offers. In the future, cloud computing will be the. Editorial Reviews. About the Author. Nicola Haughey BA (Law) llb hons studied law at the Buy Thinking Out Cloud: Cloud Computing Law: Read 2 Kindle Store Reviews - linawycatuzy.gq

Anyone with permission can not only access the documents, but can also edit and collaborate on those documents in real time. Nezamabadi, supra note 7. November 6, , General Election 13 , available at http: See infra Part IV. See discussion infra Part IV. Picker, Competition and Privacy in Web 2. Colloquy 1, 7 , http: Colloquy , , http: City of Detroit, F. Practical Insights and Strategies, at v ; see also Michael A. Miller, Pennies From Heaven—U. The Supreme Court has addressed the issue of substantial nexus numerous times over the past sixty years, each time requiring at least some physical presence to compel taxation.

Most recently, the Court reaffirmed the physical presence requirement in Quill Corp. North Dakota, U. Thus, out-of-state Internet retailers engaged in business in the State of California are required to collect sales tax. State nexus statutes are always subject to federal constitutional restrictions. Using a website to make sales to California residents, however, does not create legal nexus with the State of California sufficient to require collection of state sales tax.

In the event a vendor has no substantial nexus to the taxing state, the consumer is required to remit the use tax to their state government, though compliance is very low. Borders Online, LLC v.