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Potential changes in how states tax cloud-based services have become a hot topic in the nonprofit sector. While few nonprofits would be in the business of providing cloud-based media for things outside of their mission, nonprofit leaders might be advised to approach any sort of new digitally-provided service or revenue source carefully. As more data, fulfillment and everyday work transfer to the cloud from local servers, state and local tax officers are brainstorming for ways to tax the process. Annette Nellen, a professor at San Jose State University and author at, said the questions concerning the taxation of cloud-based services stem from the fact that sales tax in many states is directly tied to the transfer of tangible property.

Several states, such as Louisiana during the 1990s, moved beyond taxing software only if it was purchased via disk to include any software that ultimately resided on one’s computer. Cloud-based software and services further complicate matters as they do not reside on the consumer’s computer, but is accessed on an outside server, Nellen said. A state that has changed its laws to reflect changes in technology is Tennessee. While not imposing a sales tax specifically on cloud-based services or software as a service (SaaS), Tennessee began imposing a tax regardless of delivery method effective July 1, according to Kelly Nolan Cortesi, director of communications for the Tennessee Department of Revenue in Nashville. The state anticipates that the taxation of remotely accessed software and video games will bring in $11.3 million in revenue beginning in the fiscal year 2015-2016.

Tennessee exempts the use and sale of software sold to many types of nonprofits, including 501(c)(3) organizations, from the tax, Cortesi said via an email.

While nonprofits remain exempt from sales tax and many states have, to date, refrained from charging sales tax on cloud-based services, organizations might be impacted should states explore pyramid tax models in which tax is applied only upon final consumption. In the case of nonprofits, the final consumer — the client — might not be charged for the service, thus the tax could move up to the organization, Nellen said, requiring states to make a policy choice. “When you start selling a service, producing a product, you have to start looking: ‘Are we treading questionable ground tax wise,’” said Dan Murphy, a product manager at Abila software in Austin, Texas. “If you have a tax attorney, a board member and auditor, it’d be worth seeking them out. Venturing into any new area of revenue generation, that should be explored.” Michael Mazerov, senior fellow of the State Fiscal Policy Center on Budget and Policy Priorities in Washington, D.C., concurred with Nellen that few states have gone the route of taxing for cloud-based services. As taxation is based on state tax agencies’ interpretation of laws, about 20 states during the past 15 years have entered into a streamline tax agreement to create uniformity in provisions.

Jon Biedermann, vice president of software firm DonorPerfect in Horsham, Pa., said the firm is tracking changes in taxation, but he was unaware of any changes for the company’s nonprofit clientele. “At this time, we don’t see any impact on our clients and we’ll be monitoring the situation for any changes,” Biedermann said. In Canada, where DonorPerfect also does business, a value-added tax exists from which nonprofits are not exempt. Somewhat similar taxes in U.S. states, such as New Mexico, currently exempt nonprofits, Biedermann said.

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