Idaho this week classified software delivered online as a service exempt from state sales tax, in hopes of expanding the state’s budding technology sector and in contrast to what is happening at other states.
Legislation signed into law this week by Gov. C.L. “Butch” Otter separates definitions of packaged prewritten software and application software accessed online. Package software continues to be tangible property and subject to Idaho’s 6% sales tax, but software delivered as a service is no longer considered tangible property and exempt from sales tax. The legislation reverses an Idaho State Tax Commission opinion issued last year.
Idaho is the latest state to take action on cloud taxation since late 2009, as states seek to tap into the fast-growing market for software delivered from remote servers, so-called cloud computing.
Massachusetts–which like Idaho doesn’t tax services–is grappling with a similar issue since tax authorities there issued draft rules defining software as taxable in most cases “regardless of the method of delivery.” The five-page document makes clear Massachusetts intends to impose sales tax on cloud services from vendors such as Salesforce.com Inc. (CRM) and Oracle Corp. (ORCL).
The proposed rules leave open other classifications of services from custom Web design to online health-care diagnostics that could push them under the tax umbrella as well, said Andrew Bagley, research director of the Massachusetts Taxpayers
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