Amazon says to use EBS
If using a plain EC2 instance, the answer is still to use EBS as the storage for the db files. However, in my (relatively extensive) testing of this setup, write performance of SQL Server was much lower than desired when using "plain" EBS. There is now a special "fast IO" EBS that should address this: http://www.brentozar.com/archive/2012/08/fast-storage-aws/
Today, Amazon offers RDS, which offers hosted SQL Server. This is a very nice offering, but it is also very restricted in its real world use (e.g. you cannot use third party tools on your db server, etc.). As a result, I have not tested RDS (though I would like to).
So it comes down to a price / performance story. To get full control over your SQL IO environment, you need dedicated hardware. Depending on what you need from EC2, having dedicated hardware may make sense.