I never made an investment decision based on the Tax Code.

 – Paul O'Neill, former Bush Treasury Secretary and CEO of Alcoa

Following up on yesterday's post on the tyrannical, illegal, communistic Cloud Tax, I've been bothered by a number of things about the overall coverage and hyperbolic reaction to the discovery that the Tax Dept tries to interpret and apply the tax code.

The second Freep article on the subject particularly raised red flags for me:

Dealer.com used its position Wednesday as one of the leading tech companies in the state to focus attention on a stealth 6 percent tax on cloud computing that few businesses in the state were aware of, but that has emerged recently in the form of six-figure retroactive tax bills resulting from state tax audits.

…

As the Free Press reported Monday, among those affected by the cloud computing tax is Inntopia, a Stowe-based business offering online resort reservation services to ski resorts that is appealing a bill of nearly $100,000. Inntopia President Trevor Crist said he had no reason to know the tax department had issued a bulletin in September 2010 that addressed sales tax and computer software, because the department simply posted the change on its website.

Nobody likes getting a big tax bill–heck, even folks who believe taxation is necessary for a civilized society complain about such things.  But as I said yesterday, I have very little sympathy when it comes to stuff that's been in operation literally for years.  It ain't a stealth tax when the information has been publicly available all that time.

I'm rather surprised to hear that anybody in the business community would appeal to ignorance in this context.  Surely there are professional accountants and lawyers in their employ whose job it is to keep up with applicable tax code?  The information was indeed public, so one would expect your employees/contractors charged with tax issues would carry out their responsibilities of due diligence.

Continuing:

Sen. Vince Illuzzi, R-Essex/Orleans, said at Wednesday’s press conference that the tax bulletin never went through the legislative process as it should have.

“A cloud tax was never intended by the general assembly,” Illuzzi said. “Any tax bulletin has to go through the legislature. That didn’t happen with this bulletin.”

This really stopped me in my tracks.

First, why the need for the big press conference and blitz in the Free Press?  None of the reporting has suggested there's been much work by businesses trying to contact the Legislature to resolve things and being rebuffed and abused the way, say…public sector workers in Wisconsin had been.  It appears the anti-tax patriots leapt right on their horses to raise the clarion call against encroachments of liberty by tyrannical tax collectors.  Even to the point of quickly establishing a Facebook page to garner grassroots support because we all know how defenseless IBM is.

As far as the intentions of the Leg, fair enough.  This does, however, illustrate the folly of having legislators try to anticipate every new innovation in a fast-moving field, as well as the law of unintended consequences.  The way I've read the statutory language, cloud computing certainly appears to be taxable even if the folks in Mount Peculiar didn't know that it existed (and they'd essentially described it).  Whenever they deal with matters like these they ought to tread very carefully, though experience tells us it's almost inevitable that lawmakers will trip over something technical, especially when the Internet is involved.

One of the big puzzles for me was the Senator's comment about bulletins needing to go through the Leg.  I don't have a history of every one to see if the previous 53 had, but in combing the statutes I found no such requirement.

3VSA (Administrative Procedures) does say:

Where due process or a statute directs an agency to adopt rules, the agency shall initiate rulemaking and adopt rules in the manner provided…

However, 32VSA (Taxation and Finance) says:

In the administration of taxes, the commissioner may [my emphasis]:

(1) Adopt, amend and enforce reasonable rules, orders and regulations in administering the taxes within the commissioner's jurisdiction.

Parsing “may” versus “shall” and other language is much like the whole angels dancing on a pin thing, but it has real impact.  To resolve my confusion, I wrote to Sen Illuzzi and he responded very quickly, pointing me to a provision in S.173, an amended bill currently in the Senate:

Sec. 2. 32 V.S.A. § 3201(f) is added to read:

(f) Any written guidance that interprets federal or state tax statutes orregulations and that the department of taxes considers binding on any taxpayeror groups of taxpayers shall be considered a rule subject to the provisions of3 V.S.A. §§ 836–845.

So in fact, there was no requirement for the Tax Dept to have their bulletins vetted.  That really makes a lot of sense since the Leg can delegate some authority to Executive departments (within the limits ofnondelegation doctrine), and the tax code is cumbersome enough that the people who administer it need to have some ability to interpret it without checking with lawmakers at every turn.  So long as the law provides general provisions and as much detailed instruction as possible, it's up to the Tax Dept to make it work.

There are a few variations on the bill Illuzzi mentioned, by both Dems and Republicans in the House and Senate, so it remains to be seen how his will all sort out.  I'm not entirely convinced the provision above is necessary, nor do I see much wisdom in exempting cloud computing from sales & use tax, but the Leg is doing their job and that's cool.  Bottom line from all this for me is that despite a lot of hypeventilating, the Tax Dept did not err in procedure or interpretation of statute, and whatever problems that have cropped up are being dealt with in ways consistent with the rule of law and our constitution.

A concern that has nothing to do with the law per se is how corporations like IBM and Dealer.com are playing this game.  It's not surprising that they'd complain about a tax levvied on their services, but this brouhaha seems like just the tip of the proverbial iceberg in what we can expect this election season.  Who needs SuperPAC money when you can pick an issue, throw stuff onto the Internet and get everybody in a lather?

Really, is IBM going to be hurt by a sales tax and unable to compete?  Will people stop buying their services because there might be a tax?  Would they really stop innovating because the state might expect a small slice of revenue?  No, no, no, no, etc.

The timing strikes me as odd.  Oh, I get that these retroactive tax bills were the catalyst.  It's of interest to me, though, that this is happening right after the state budget was passed, the session is nearing its end and campaign season is about to begin.  

Many of the comments I've seen blame the Governor for the tax as though he's some big socialist trying to illegally tax the air, despite the fact that prescribed legal processes were not ignored and this tax language had been around since the Douglas administration.  The press conference wasn't necessary to highlight some egregious, long-standing abuse: it sounded more like a (not overly) subtle attempt by corporate interests to paint the Governor as a typical tax-and-spender in dire economic times.  

Are people really going to fall for that?  Based on the media coverage and reaction I've seen online, the answer seems to be yes, their judgement can be clouded by a few simple tricks.  There ought to be a tax on Facebook astroturf…

ntodd