The Idaho House voted Monday to approve House Bill 243 which would exclude cloud computing services from being charged Idaho sales tax. The measure would upend a recent decision by the Idaho Tax Commission to assess the tax.
The House voted 65-2 to pass the bill, sending the measure to the Idaho Senate for its consideration.
Only Boise Democratic Rep. John Gannon and Moscow Democratic Rep. Shirley Ringo voted against the bill Monday.
Idaho lawmakers took up a measure this morning that would help define so-called "cloud" software and whether it should be subject to taxation.
"This is one of those moments where Idaho can send a positive message to its existing software companies," Jeff Sayer, director of the Idaho Department of Commerce, told the House Revenue and Taxation Committee. "And we can send a message to the rest of the world that Idaho is friendly to new software employers."
House Bill 243 would define cloud software as a service and not a tangible product that would be subject to sales and use taxation.
But that's not how the Idaho Tax Commission sees it.
"Last year, the Tax Commission started taxing our customers," said Matt Rissell, CEO of TSheets, a Boise-based provider of online timeclocks. "When the [tax commission] came in at the end of October 2012 to audit us, they took our customer lists. They went and punished all of my Idaho customers who were doing business with TSheets. And they added damages and fees to the tax. That's not a fair example of applying tax code."
If the Idaho Tax Commission's position on taxing cloud software is correct, an exemption could cost the state as much as $700,000 annually.
But a string of Idaho-based software developers stood before the committee to support the exemption.
"We truly feel that this is a service and shouldn't be taxed," said Natalie Shores, director of finance and administration for WhiteCloud Analytics.
And attorney Rick Smith, partner at Boise-based Hawley Troxell Law, who helped craft the legislation, said the current sales tax law, enacted in 1965, never considered something like cloud computing.
"Current law is quite vague, very broad and ambiguous," said Smith. "Let's face it; exemptions aren't popular. But let's not call this an exemption."
Smith said other states were "all over the map on this issue," with some states assessing tax on cloud computing and others choosing not to.
Midvale Republican Rep. Lawerence Denney told Smith that a few citizens in his west Idaho district had already been hit by the tax.
"Some of my constituents have already been audited and are facing tax penalties. Is there any recourse for them?" asked Denney.
Smith called the debate "an active controversy."
"But I'll give you my business card," said Smith. "I believe there is recourse."
Ultimately, the committee unanimously approved HB 243, agreeing that cloud computing was a service, not a tangible, taxable product—sending the measure to the full House with a "do pass" recommendation.
"The Legislature is going to need to be vigilant and open in tinkering with this statute as time goes on," said Smith.