This may not be the shot heard around the world, or even the one heard around the United States. That said, the news that the State of Illinois, in General Information Letter ST 13-0074-GIL, has determined that certain software applications and remote services offered through the cloud are not considered telecommunications, and thus are not subject to the Telecommunications Excise Tax, is something that regulators in other state, federal and international jurisdictions are going to likely take a look at.
Thanks to a release from tax experts at Ryan, LLC, the news from Illinois is already a topic of discussion in the blogosphere. In brief, what Illinois has concluded is that software and services, while used to support customers' telecommunications equipment, are accessed by customers through their own telecommunications connections that the customers purchase from third-party telecommunications providers. “As such, the state does not consider the cloud-based software and services to be taxable telecommunications,” the firm said.
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It is further noted in support of the conclusion that electronically transferred or downloaded information or data is nontaxable pursuant to 86 Ill. Adm. Code 130.2105(a)(3). A distinction is made between information or data and "canned computer software," which is taxable when electronically delivered unless it meets the qualifications of a license of software according to 86 Ill. Adm. Code 130.1935(a)(1).
The reason this is so noteworthy is the drive in many states to deregulate entirely VoIP services and have them classified as information services instead of falling under the definition of regulated common carriage, and the recent defeat in a lawsuit by Verizon that sent the FCC’s (News - Alert) Open Internet (aka “Net Neutrality”) regime back to the drawing boards, what actually constitutes a telecommunications services is becoming murky.
The fast evolving hosting of VoIP and the prospect of large enterprises in essence becoming telecom service providers for their ecosystems, the looming death of the PSTN, along with all of the doubts now cast about how the FCC is going to find a path forward for providing universal and affordable broadband access in the U.S., only make all of this even (pardon the expression) cloudier.
The only good news here is that if you are a consumer of “certain” cloud services in Illinois you are not going to have to worry about a line item for excise tax on your bill. The ripple effects of this are going to be something to watch.
Edited by Alisen Downey