Taxing the Cloud

Some US states are seeking to create a special cloud computing tax; what this means for individuals and businesses

For a long time, the general approach has been to avoid imposing sales tax on internet-based goods and services. This is especially true when sales and shipping are being processed from out-of-state and local governments aren’t really involved in a transaction in any way. Well, as we’ve seen recently, there’s been a bit of a push by lawmakers to tax the sale of all products and services sold through the net. Ultimately it would seem, the decision to impose such a tax is being left in the hands of state governments, with only Virginia and Maryland pushing for immediate action. Maryland Governor Martin O’Malley actually wants to extent the tax to extend the tax to include digital products as well. cloud computing tax

Massachusetts policy makers have been directly addressing cloud computing and the moral ambiguity surrounding it. Basically, what they’ve been able to determine is that that “pure cloud computing” isn’t taxable and that any kind of product/service requiring receipt of physical software of download of it, is taxable. So, what is “pure cloud computing”, you ask?  When you have a service that runs by means of complete virtualization (all hardware, software and “action” takes place remotely), then we are talking about “pure cloud computing”. Often times an individual or business employing a pure cloud will only need little more than a bare-bones system consisting of little more than a browser OS and a monitor. This type of cloud computing is nearly always a service that’s delivered from out-of-state as well, making it tax exempt in two distinct ways. SaaS vendors (which are either mailing out software or having customers download packages to access their services) on the other hand, may bear the brunt of the tax burden.

The questions of the day are: will the taxation of the cloud set the precedent for additional future cloud tariffs (in the long-term) and will this have an effect on the types of cloud services people / businesses flock to (in the near -term)?

It’s fairly safe to say that the reason why some state governments are so eager to tax the cloud is because they see its popularity rapidly increasing and the immense value it brings. Furthermore, the stellar sales being reported for 2011 have most likely had a great deal to do with this initiative as well. In other words, given that many state governments are hungry for cash, setting a tax precedent for a potentially lucrative area like cloud computing might be seen as way to boost annual budgets without having to actually do much of anything.

The problem is that this might very well open the door for taxing all non-tangible items and computing services all across the board, which would include every single form of cloud computing out there. As you are no doubt already aware, that’s how these things usually work – a few initiatives are passed which grants the power to tax a new type of product or service and shortly thereafter, taxes are rolled out for anything that’s similar or related. Likewise, once these types of taxes are in place, they’re often incrementally raised without much effort – just refer to Tobacco and Alcohol {I’m not defending these institutions or the harmful products they sell; only demonstrating how certain products tend to be taxed}. Then you also have to realize that if too many state governments begin taxing the cloud at will, it will have a direct effect on the growth of the entire industry. After all, we’re talking about collecting taxes on non-tangible goods which are being provided by businesses located out of state. As far as in-state commerce is concerned, perhaps there is justification in certain circumstances, but we’re really talking about “cross-border” precedents here.  

Taxes levied against certain types of cloud providers will also have a direct effect on the way consumers approach cloud computing as a whole. This isn’t rocket science, if one area of cloud computing is taxed while another is not, those being forced to assume these costs will have to overcome additional obstacles. Moreover, if you’re a SaaS vendor, you’ll likely have to raise your prices in order to offset tax-based losses. The end result of these tax mandates will be that prices on certain types of cloud offerings will spike, which will ultimately steer users toward the cheaper, non-taxed offerings. The question is, once lawmakers realize that people are opting for non-taxed cloud services will they then decide to take further steps?

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New Cloud standards are on the way

The SNIA is seeking to create a cloud storage initiative which will make increased standardization of systems and models possible

Whether we’re talking about computers, IT, or the development of Western medicine and science in general; the fact is – standards exist to create order (so progress can be achieved). The evidences of the positive effects of standardization are obvious when you use Western medicine as an example. Simply put, with each step forward that’s made, mistakes are minimized, risks are averted. The simple act of requiring physicians to wash their hands before procedures (instituted by Ignaz Semmelweis during the 1800’s) seems to have had a very significant effect on the eventual development of the entire field of medicine. Basically, standards are generally good for growth.

This is just one of the reasons why the prospect of having some new cloud standards in place is such a big deal, however. To be honest with you, the situation we have going on right now in the cloud computing world is a slightly turbulent one. Sure, there are plenty of services of each type (IaaS, PaaS, & SaaS) out there which work; multiple vendors for each too. Yes, they seem to be functional as well, giving their users the experience they’re after.

But what we should be wondering is, how many opportunities are being missed on a daily basis because of problems with interoperability? The truth is, we need to be able to unite all the different aspects of cloud computing into one complete and accommodating system at some point (and the sooner the better).

Once again, individual pieces of the cloud, in the form of applications, services and even types of user data, need to be accessible alongside newer and emerging forms of cloud technologies. Individuals and businesses need to be able to build their clouds (and access their data) in the manner they see fit, with the apps and technologies that they want to use. If we have to go through a lengthy “compliancy dance” every single time a new cloud service, app or concept emerges (the time it takes to make it available in a commercial capacity) then we’re really just restraining ourselves, aren’t we?

Things seem to be changing now, as the Storage Networking Industry Association (SNIA) is taking steps to establish a system for cloud storage, called CSI (or, the Cloud Storage Initiative). The first steps involve collecting terminology and creating a definitive reference for all cloud computing terms. Next, they are to begin actually compiling reports / white papers, and other things like demonstrated cases / examples, and tech specs for various models. Say what you like, but it sounds like a cloud version of ITIL to me…. which we could certainly use right now.

Another concern is the ability to begin laying the foundation for a complete cloud computing standard which would allow almost any types of IaaS, PaaS, and SaaS services to be used interchangeably. Obviously, this is something that’s a bit far off in the future perhaps, but this is the type of pattern or trend that we often see emerging (increased standardization leading to higher levels of integration among all components).

But it is really that highly doubtful to assume that great progress will be achieved? After all, we actually see the results of standardization all around us, the most glaringly obvious example of it being the computer or device that you are holding or using to read this right now. It could be argued that it was a certain type of specialized and standardized thought that led to the creation of first computer.

Imagine the insane world we would live in if computers or devices were lacking standardized inputs and connectors like USB or Ethernet ports. Think about all the standards surrounding electronics and electrical engineering, which helped to forge and even make internal computer hardware possible, from a developmental standpoint.

We could be standing on the edge of an entirely astounding cloud revolution, something made possible only through standardization. Exponential growth is what we may very well be looking at, which is almost mind-boggling when you consider the inherent (statistical) capabilities of cloud computing itself. Needless to say, now is a good time to be in the cloud.

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Cloud Computing’s cumulative effect on outsourcing

Depending on who you talk to, Cloud Computing is either enabling current outsourcing operations or ensuring that they will soon become a thing of the past. The truth is, the cloud is having an effect on outsourcing, but only in a limited capacity (with big upward trends being reported by Gartner for the coming years). Right now, providers simply don’t have the stats to indicate that cloud computing is impacting the outsourcing market in any way that might indicate a potential threat to the status quo. In other words, businesses are going to continue turning to non-cloud sources for both IT management and applications.

However, one of the things that make cloud computing so powerful is its ability to assimilate new ideas and approaches. For example, if vendor-provided IT management (through the cloud) doesn’t catch on as expected, what’s to stop providers from deploying outsourced workers in a service or app-like manner? Just imagine signing up for a new cloud account with a vendor and actually getting to choose your outsourced IT team from list and integrating them into the infrastructure as if they were another component. Sure, this might sound a bit far-fetched, but it is another example of the inherent flexibility that a ‘cloud-based’ approach brings with it.

Currently, application and data center outsourcing are kings where business and IT are concerned. Simply put, there is great value in the services of application specialists who are really able to bring useful abilities to the table. As IT continues to play a more direct and informed role in the daily duties of all types of institutions and businesses, more specific applications are often needed. Sometimes these apps aren’t ready available, other times; they might not even exist in a format that can provide direct benefit. This is of course part of the value of application outsourcing – the ability of an organization to get exactly what they’re looking for, or have someone actually create it.

Data center outsourcing often comes in the form of co-location, which is where you pay another organization to house your physical servers, storage and handle on-site security. Carrier-neutral data centers are probably the most common and offer clients the ability to choose who they want to actually do business with as far as telecom companies are concerned. Businesses love data center outsourcing because it offers the ability to access more expensive setups without incurring the large investments. Likewise, it may even be possible to use your current IT staff in one these types of arrangements.

While this (data center outsourcing) might seem share a lot of traits with cloud computing, the similarities are only skin deep. What makes the cloud different is that it is a complete approach to computing, networking and IT in general, and is not merely one component of the infrastructure. A dedicated cloud computing-based IT service would include the actual benefits of establishing one’s own customized system along with the perks of full management via supplied personnel.

Obviously, this type of setup may not work in certain types of situations where IT is directly connected to the business end of an organization and plays an active role in things on multiple levels. For these type so of circumstances, IaaS is probably the best way to go; if you measure it by its popularity, it’s clear that businesses are engaging this type of cloud computing solution. The reason behind this is simple, through IaaS; you are able to outsource virtually everything related to hardware and onsite security while gaining access to the apps and elasticity of the cloud. Additionally, IaaS actually allows an organization to remotely control and manage their IT operation (via cloud-based connectivity) as if they were physically in touch with the hardware. Furthermore, IaaS is open-ended on the infrastructure side as well, meaning, you are not usually tied to “packages” and are free to create, design or deploy what you want in any way you choose.

Taking advantage of advancing forms of cloud computing in a business capacity does require IT personnel with the proper training and certification, however. Attaining some specialist training in IaaS probably wouldn’t hurt either.

Inside, or internal employment/hiring of IT staff is being affected by all forms of outsourcing (cloud or non-cloud) of course, just as you would expect. But where most seem to be thinking that cloud computing will only further hasten the demise of the IT professional, it might actually be helping to save them. Whereas traditional outsourcing often seeks to take what companies have already built up over the years (in terms of infrastructure) and further customize it, cloud computing offers more standardized approaches.

The great thing about open-ended “packages” and “service options” is that they represent a more highly developed and organized layer of choices that helps to bring additional structure to all other levels. Companies can still have their IT department managing their infrastructure directly via the cloud (if we’re talking about IaaS), but unlike simple application or data center outsourcing, there is more flexibility and control. Basically, cloud computing offers an opportunity for businesses to utilize their trusted IT workers and IT professionals aren’t losing anything aside from physical (on-site) access to hardware.  As the importance and awareness of IT security continues to grow in value, businesses are likely to turn to on-site personnel for direct management of cloud-computing-based IT infrastructure. The reason for this is simple – they can be micro-managed and kept in check via compliance protocols featuring direct oversight.

IaaS captures a sizable chunk of the IT outsourcing market

In 2012, IaaS has already captured around 38% of the outsourcing market (according to Gartner). While you might be inclined to say or think that this is still a paltry percentage, keep in mind that the figure was 8% in 2011. That’s right, where outsourcing is concerned; IaaS has actually grown by around 30% in less than one calendar year! What’s even more interesting is that experts aren’t predicting this rapid wave of growth to subside any time soon either. In other words, IaaS is quickly becoming synonymous with cloud computing and business-related services.

Why is IaaS such a hot item?  One of the first problems that organizations and providers ran into with earlier types of cloud computing solutions was a lack of direct client control. Basically, businesses would sign up for cloud services and be forced to build their package from a list of options and then more or less hand the reigns over to the vendor’s IT squad for basic management. Suffice it to say, this sort of approach didn’t go over so well with certain types of companies.

There are a number of issues which might make this type of arrangement less-than-ideal for bigger institutions. First off, if you are very dependent on critical IT services, what better system for managing risk is there than ensuring things yourself? Likewise, if you deal with sensitive data on a regular basis (compiling valuable information that malicious or competitive groups would pay for access to) security is going to be of a much higher priority as well.

Additionally, there may even be direct cost-based reasons for wanting to manage one’s own IT services. You can rest assured that vendors are going to make sure that cost of utilizing their management squads is going to be “offset” somewhere. In the end, it might actually be cheaper to simply outsource all the hardware considerations and keep current IT personnel on to manage the new infrastructure. (This is where cloud computing certification and IaaS training come into play of course).

The answer to these cloud questions and concerns is IaaS (Infrastructure-as-a-service). IaaS is able to give businesses (with more specific needs) the appropriate level of control which they desire; this is what makes it such a popular IT / computing / networking solution. This also explains why IaaS is growing so quickly and capturing big portions of the outsourcing market, funds that were being spent on the usual expensive hardware and software upgrades are now being diverted toward other areas, like project development and/or personnel.

Through the use of IaaS, an organization can remotely manage their IT infrastructure while implementing completely new bespoke forms of cloud design. Just think about those businesses that are transitioning to the cloud and are bringing a number of integral legacy apps with them. These types of groups often can’t allow random strangers to oversee the integration, assimilation or alteration of their legacy software; this is true for a number of different reasons. For starters, you can’t be sure that any process has been successfully completed unless you have access to the results and / or can gather analytical data.

In truth, there are an almost infinite number of reasons why businesses would want to maintain direct control over their cloud infrastructure. When a business takes a more proactive approach to setting up their cloud, they’re much more certain about how and why things are working and behaving a certain way. Furthermore, if a certain level of expertise is required, isn’t it better for an organization to spend whatever is necessary in order to ensure that things were done right the first time (in a secure manner / environment)?

Now that we’ve established why IaaS is such a powerhouse, you’re probably wondering who the “big dogs” of IaaS are, right? As this Gartner release clearly details, when it comes to IaaS Amazon Web Services (AWS), Savvis and CSC are the main contenders as they all possess superior vision and ability to execute plans. The clear leader, AWS, also has what is arguably the most successful cloud computing company in history (up-to-this-point) financing its IaaS program.

Quite simply, Amazon always seems to be one or two steps ahead of everyone else when it comes to innovation in the cloud; this applies both in terms of use of new technologies and implementing new concepts. AWS is also focused on what’s going on in the market, and are making very smart moves to ensure that they remain on top. Aside from these big benefits, Amazon’s AWS also touts the most extensive capacities and is quick to forge new partnerships with other vendors. The end result of all of this activity is an ever-growing list of newer and better services which are only becoming more secure and less expensive with each passing day.

Whether or not IaaS is right for your company depends on what your capabilities are and how much direct control you require. If your business is not capitalizing on IT innovations or even using technology to drive everyday operations, then a more standardized form of vendor-managed cloud computing might be sufficient. However, if your organization is on the cutting-edge or very reliant on one or more forms of IT services, IaaS is really the only way to go.

Up, up, and away! Cloud Computing appears to be an unstoppable juggernaut

Certainly no one would argue that cloud computing is one of the most hyped technologies in existence, the question is – are we dealing with something legitimate or not? All available statistical data seems to suggest that cloud computing is most definitely worth of the publicity it receives. Consider this revelation from IDC:

“Recent IDC cloud research shows that Worldwide revenue from public IT cloud services exceeded $21.5 billion in 2010 and will reach $72.9 billion in 2015, representing a compound annual growth rate (CAGR) of 27.6%. This rapid growth rate is over four times the projected growth for the worldwide IT market as a whole (6.7%).” 

In other words, cloud computing is by far the fastest growing sector of IT. What’s more, the big growth spurt in the cloud doesn’t appear to be slowing down at all, in fact, and it seems to be speeding up! For example, research conducted by Forrester predicts that:

“The global cloud computing market will grow from $40.7 billion in 2011 to more than $241 billion in 2020”

At this point you’re probably wondering why this kind of growth would be needed, right? Well, one of the areas of study which has allowed groups like Gartner, IDC and Forrester to make bold predictions regarding continuing growth in the cloud are the demands placed on data centers, internet-related traffic and existing cloud services deployed through social media. Gartner recently went on record to state that very soon (by the year 2016) roughly 1/3 of all the data in the world will be in the cloud. Understandably, this has created quite a buzz in many different circles (particularly investing). For those that don’t understand the driving forces behind all this runaway growth, consider the following statistics which were compiled by Zenoss:

• The world’s entire well of information is doubling every 2 years
• There are around 48 hours of video added to Youtube every single minute
• Over the last 3 years, around 74% of data centers increased their total server count
• 5.75 million new servers are added each year just to match the growth pace of online services
• Around 55% of those surveyed were able to connect cloud computing with a lower total coast of ownership (TCO)
• Of those organizations in the cloud, a 21% annual savings was reported for applications that have migrated to the cloud
• For those who already utilize cloud computing, 84% have seen reduced application costs

These are just some of the more easy-to-grasp factoids which are floating around. The point is, the world has an insatiable appetite for data and storage, and it seems that traditional IT is neither technologically capable of meeting growing demands or providing efficient pricing. Likewise, it could be argued that the amount of money needed to service the expanding data demand simply might not exist without more efficient technologies (like cloud computing) in place.

Another issue we’re facing – rising energy costs across the globe. Simply put, we’re experiencing an unprecedented global economic situation whereby entire continents are entering recession. One could say that cloud computing is highly advantageous because it is able to lower annual energy consumption costs with no loss of capability. Moreover, cloud computing tends to cost less when compared with traditional IT setups, so we’re really talking about a win-win situation here.

In terms of actual markets which are contributing to cloud growth, large corporations, small businesses and individuals are all taking part. According to a CDW report:

“28% of U.S. Organizations are Using Cloud Computing and 38 percent have a written strategic plan for the adoption of cloud computing”

Perhaps one of the largest potential growth markets for cloud computing is the medical field. For instance, KLAS research is reporting that:

“In a survey that ran the gamut from small clinics to 1,000-bed hospitals, 55% of the respondents already had something in the cloud, whether it was clinical applications, storage, e-mail, or picture archiving and communication systems. Nearly a quarter of this group used remotely served electronic health records.”

Now, realize the growing demand that baby-boomers for health services will create as they continue to retire. It’s fairly obvious that the use of cloud computing in health-related settings is a great way to offset costs, increase efficiency of record keeping and even reduce or eliminate mistakes associated with patient data / human error.

So, what does this all mean, you might be wondering? Well, if you’re a business owner or IT manager, you need to begin analyzing your needs and evaluating your cloud service options (IaaS is one of the fastest growing and most attractive options for most businesses these days). This will also mean updating the certification standards for your IT personnel as well; some simple and affordable cloud computing certification should do the trick. For investors and those interested in capitalizing on the projected growth in the cloud, cloud brokerages are becoming increasingly attractive.