As more commerce moves online, states struggle to tax the internet. Cloud computing often transforms taxable goods into nontaxable services. Companies that once installed racks of servers in their offices and bought software on CDs are replacing them with offsite solutions sold by IBM, Amazon.com, and Google, among others. A company in New York can sell space on servers in North Carolina to an Illinois company with offices in Texas and Florida, leaving businesses, customers, and tax collectors to squabble over who should pay what to whom. "The states are dealing with it quite poorly, not because they're trying to deal with it poorly, but because they're trying to adapt," says Reid Okimoto, a senior manager at KPMG.
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