Vermont state lawmakers, tax officials, and representatives of the business and software communities voted 4-3 on Monday to exempt businesses from a tax on cloud computing services.  “The members of the Sales and Use Tax Study Committee who are in favor of a tax on remotely accessed software argued that the state would lose $2 million in potential tax revenue in the first year, and untold millions more in future years, as businesses expanded and scrambled to exploit a tax exemption.”

Vermont is not alone.  Many states are debating how to tax cloud computing services that really don’t have clearly defined patterns.  Indeed, the legal and tax definition of cloud computing is in dispute.  Are taxes owed on computing services that actually physically exist in other geographical locations?  Should they charge tax where the cloud data center exists, or where the services are consumed?  Perhaps both?  If so, how much?

The debate is disturbing to those in the emerging world of cloud computing who view the move to tax cloud computing services as something that will hinder growth.  Indeed, most choose cloud computing around the cost savings.  If there are taxes levied on these services, then cloud computing becomes less attractive.

However, those who are pro cloud tax would argue that the shift in leveraging software and infrastructure installed locally, to software and infrastructure delivered over the Internet, should also mean a shift in how software and infrastructure services are taxed.

I suspect the debate will rage on this year.  Some states will hold off on taxing the emerging cloud computing space while others, hungry for revenue, will tax the cloud.  It’s bound to be complex and confusing.