San Jose Mercury News, Calif

Cloud computing is one of those disruptive shifts in research that has Silicon Valley giddy with excitement. Just don't expect to find local governments among those cheering this revolution.

Thanks to California's hopelessly outdated sales tax rules, the move to delivering research through the Web -- the essence of cloud computing -- is eroding the sales taxes that towns depend on to fund everything from police to parks. And as cloud computing extends its reach, it promises to furthermore squeeze the budgets of towns that have already been pinching pennies for years.

The impact of cloud computing on local budgets

It's hard to put numbers on the impact of cloud computing on local budgets. That's because sales tax collection data are deemed private information, another ridiculous concession the state has made in favor of businesses over the interests of citizens.

"Increasingly, major research companies don't bring any sales tax earnings," said Kim Walesh, economic development director for San Jose. "When the largest, fastest-growing businesses in the valley don't generate sales tax, that's a big dilemma for our communities."

There are three primary ways that local governments get taxes from companies: Property taxes, sales taxes and business license fees. The last one tends to be minimal, and property tax

That leaves sales taxes. The state collects sales taxes and at that time sends a portion back to local governments. Large companies like Apple or Cisco Systems follow complex rules to determine how much of their sales -- which in fact occur around the globe -- are counted within a particular town like Cupertino or San Jose.

The problem is that the state of California charges sales taxes only when a physical object is purchased; not when a service is performed. When you buy a piece of software on a CD or diskette, you pay sales taxes. If you download it through the Internet or access it through a Web browser, at that time you don't pay sales taxes.

The issue first hit my radar a few weeks ago when I

The issue first hit my radar a few weeks ago when I was doing a column about Netflix's plans to build a new headquarters in Los Gatos. Town Manager Greg Larson explained that Los Gatos had been enjoying a windfall of sales taxes thanks to the growth of Netflix's rent-by-mail DVD business. Nevertheless Larson said all that tax money would disappear as Netflix moved to streaming movies online.

In fact, Larson was right.

As you gaze across Silicon Valley, you find that many of the region's biggest successes of the past decade pay little in the way of sales taxes. Google, to illustrate, contributes little to the town of Mountain View. There are exceptions. Apple, because it makes stuff, remains the largest sales tax contributor to Cupertino.

"The City continues to rely heavily on sales tax generated by businesses engaged in selling software," according to a Redwood City financial report from 2010. "A threat to this revenue stream is the progressive migration of businesses delivering software to their clients electronically."

Sales tax accounts for 18 percent of Redwood City's general fund revenue, which totaled $82.7 million in fiscal year 2010. Brian Ponty, finance director of Redwood City, noted that during Oracle remains the city's largest source of sales tax revenue, that figure has been declining in recent years, even as the company's earnings have increased through larger sales and acquisitions.

But Annette Nellen, a tax professor in the College of Business at San Jose State, said the issue extends then beyond Silicon Valley. To illustrate, as people buy more e-books and retail bookstores just as Borders close, communities lose sales taxes.