Computer-System Design/Software Services Now Taxed at 6.25% Effective July 31, 2013   2 comments

TIR 13-10 Issued; Additional Regulations and Letter Rulings Urgently Needed

By Attorney Morris N. Robinson, CPA, LLM

July 29, 2013

On Wednesday, July 24, 2013, the Massachusetts Legislature overrode Governor Patrick’s veto and enacted a 6.25 percent sales tax on computer-system design/software services. The new tax is part of the new $800 million transportation bill. The new tax becomes effective on Wednesday, July 31, 2013.

The new law taxes “the modification, integration, enhancement, installation or configuration of standardized software.” M.G.L. c. 64H § 1 (new definition of “services” subject to sales and use tax) (effective July 31, 2013). The scope of the new tax on software modification services is reasonably well-defined. TIR 13-10—which provides guidance on the new law—states that “the new provisions serve as overlapping descriptions generally intending to tax software services that modify, enable or adapt prewritten software to meet the business or technical requirements of a particular purchaser and to operate on the purchaser’s computer systems, regardless of how those services are described or billed to the customer.” TIR 13-10: Sales and Use Tax on Computer Software Services Law Changes Effective July 31, 2013 (emphasis added).[1]

The new law also taxes “the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies” where these services are provided by a “vendor or a third party.” M.G.L. c. 64H § 1 (new definition of “Computer system design services” subject to sales and use tax) (effective July 31, 2013). Unlike the new statutory language relating to computer software, the provisions regarding “computer system design services” are inherently ambiguous and TIR 13-10 fails to explain exactly how they will work. For example, TIR 13-10 fails to address the following points: 

  • Suppose a taxpayer purchases software along with a computer, monitor, printer and keyboard. If an outside vendor installs the software and connects the cables for the hardware, does the installation of the software and cabling of the hardware now constitute taxable “consulting” services that “integrate” hardware and software? Or would these services be considered consulting and evaluation services “not directly related to a particular systems integration project involving the sale of computer hardware or software.” TIR 13-10, Part II
  • The new computer systems design tax seems to apply to the “planning” and “design” of server systems that allow PCs to “talk” with each other and use software and data stored on the server. Arguably, these server systems “integrate hardware, software or communication technologies.” Does it make a difference whether the computer server is owned by the customer or is owned by an unrelated third-party (i.e., “cloud computing”)?
  • Suppose the new computer systems design tax applies to cloud computing (i.e., a third party provides access to computer software through a shared program accessible via the internet) and the server where the program resides is located outside Massachusetts. Is the out-of-state vendor liable for the Massachusetts sales tax on design services on the basis that the out-of-state vendor is providing computer design services to Massachusetts businesses and thus has “economic nexus” with Massachusetts?
  • The computer systems design tax does not apply unless the services are provided by a “vendor or a third party.” Thus, if a business uses an employee to design computer systems, the tax does not apply. But it is unclear whether the new tax applies if the business uses an employee (chief communications officer) and one or more independent contractors to design computer systems. Does it matter if the independent contractor is treated as an “employee” for payroll tax and workers’ compensation purposes? Furthermore, should the Department of Revenue be concerned about the potentially discriminatory impact that this new tax might have on small businesses that are unable to maintain in-house IT departments?

The inherent ambiguities in portions of the new law jeopardize those who sell computers and computer design/modification services, placing them in a cruel dilemma. Vendors who mistakenly collect a sales tax on computer design/modification services will find themselves at a significant competitive disadvantage vis a vis those vendors who do not collect the tax.

Vendors who fail to collect a valid sales tax may find themselves in an even worse situation. Vendors are required, by law, to include sales taxes on their invoices and to collect and remit sales taxes in a timely fashion, whether or not the tax is collected at the point of sale from the purchaser. As a practical matter, vendors who do not collect the sales tax “up front” (i.e., at the point of sale) may find it impossible to collect the tax at a later time. Meanwhile, the president, board of directors, and chief financial officers might find themselves personally responsible for any unpaid sales taxes on services including penalties and interest on the unpaid tax and penalties. These unpaid taxes, penalties and interest add up quickly. Computer design sales of $1.6 million translates into $100,000 in sales taxes without considering penalties and interest. Indeed, proponents of the tax expect the tax to bring in about $161 million in new tax revenue on an annual basis.[2]

Therefore, vendors may want to consider the following options:

  • Send informal comments and suggestions to the Massachusetts Department of Revenue. TIR 13-10 encourages taxpayers to submit “comments or suggestions regarding the application of sales and use taxes to . . . computer/software services.” The Department of Revenue also anticipates that there will be “opportunity for public comment on a working draft of the regulation amendment before it is formally proposed.”
  • Come together as an industry and present the Massachusetts Department of Revenue (“MDOR”) with a proposed regulation. The MDOR will likely welcome this type of intervention. The problem with this approach is that it takes time and there is no guarantee that the computer design industry will be able to coalesce around an agreed-upon regulation.
  • Request individual letter rulings from the MDOR. Vendors may choose—with the assistance of general counsel or outside counsel—to request a private letter ruling from the Massachusetts Department of Revenue based on the facts and circumstances of individual cases.  

What are letter rulings? They are rulings issued by the Massachusetts Department of Revenue to a particular taxpayer. There is no filing fee involved in requesting a ruling. The professional fees, however, can be substantial. Technically, the ruling protects only the taxpayer that applies for the ruling. Normally, however, the Massachusetts Department of Revenue will treat all similarly situated taxpayers equally as long as all have acted in good faith.

Why might a taxpayer opt for requesting a private letter ruling instead of submitting an industry-approved draft regulation to the Massachusetts Department of Revenue? First, letter rulings are tailored to the specific needs of the requesting taxpayer and do not consider the tax consequences to the requestor’s competitors. Second, ruling requests (unlike drafting proposed regulations) can be crafted, drafted and filed fairly quickly. Third, the professional fees associated with requesting private letter rulings are often quite reasonable when weighed against the requestor’s competitive and financial exposures, as outlined above. For all these reasons, requesting a private letter ruling may be preferable to submitting an industry-approved draft regulation to the Massachusetts Department of Revenue.

~End of Article~

 

Morris Robinson, CPA, LL.M., is Managing Director at M. Robinson & Company, P.C., a boutique tax firm in downtown Boston focused on the resolution of federal, state, and international tax controversies for corporations, small businesses, and individuals. M. Robinson & Company is available to provide complimentary 30 minute initial consultations regarding the process for requesting private letter rulings from the IRS and/or Massachusetts Department of Revenue and the likelihood of success for such a ruling according to the particular facts and circumstances of your company’s case.


[1] Our firm intends to issue another Massachusetts Tax Alert that reviews and summarizes TIR 13-10.

[2] See Statements of Senate Ways and Means Committee Chairman Senator Stephen Brewer (D-Barre), available at http://massachusettschamberofcommerce.com/transportation-finance-bill-mass-senate/ (last visited July 29, 2013).

Posted July 29, 2013 by Mass Tax Lawyers in Uncategorized

Tax Legislation: Governor Patrick Vetoes Transportation Bill   Leave a comment

The Massachusetts House of Representatives passed a new software tax as part of the transportation finance bill, H. 3535. On July 17, 2013, the House passed an amendment to negate all the changes proposed by Governor Deval Patrick, who is seeking additional tax increases. The Massachusetts Senate also passed H. 3535 without making any changes, according to an email message from Martine Powers, a reporter with the Boston Globe. The bill proposes to pay for state transportation projects by increasing several taxes.

The bill proceeded to Governor Patrick, who vetoed it on Friday, July 19, 2013. The legislature may override the governor’s veto. They will vote on a possible override this week, i.e. by July 26, 2013.

LEGISLATIVE BACKGROUND

Massachusetts General Laws, c. 64H s. 2 provides as follows: “[A tax] is hereby imposed upon sales at retail in the commonwealth, by any vendor, of tangible personal property or of services performed in the commonwealth at the rate of 6.25 per cent of the gross receipts of the vendor…”

What are “services?” The statute defines “services” in Massachusetts General Laws, c. 64H s. 1. Section 49 of the bill (H. 3535) amends the statute so that the word “services” will include “computer system design services.” Section 48 of the bill amends the statute, c. 64H s. 1, to add the following definition:

“Computer system design services,” the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party.

It follows that “computer system design services” will be subject to a 6.25% sales tax if the bill becomes law.

The “computer system design services” are sometimes called “cloud computing.”

OPPOSITION BY STAKEHOLDERS TO THE PROPOSED NEW TAX

Michael Farrell reported for the Boston Globe that the technology sector did not lobby strongly against the taxation of software services when the bill was first proposed in June, and it may now be too late to change the bill. The bill has bipartisan support on Beacon Hill. Governor Patrick opposes the House version of the bill on other grounds, but he supports the taxation of software services.

The Worcester Telegram opposed the tax in a staff editorial titled “Doesn’t Compute.” That newspaper argued on July 8, 2013 that “we don’t need a new tax burden on the state’s most productive industries, including the life sciences, health care and finance.”

The Massachusetts Taxpayer Foundation also opposed the tax in a press release dated June 26, 2013. The press release argues that the tax “strikes at the heart of the Massachusetts economy, costing countless jobs for years to come.” The chart in the press release shows that computer services are subject to a full sales tax in only three other states: New Mexico, Hawaii, and South Dakota.

TechAmerica, the leading U.S. technology trade association, also opposed the new tax in a press release and a letter to the Massachusetts legislature. Kevin Callahan wrote in the letter, “The proposed tax on computer system design services included in the transportation financing package…punishes businesses – particularly the technology sector.”

We do not express an opinion for or against the proposed new tax.

CLARIFICATION OF WHAT COMPUTER SERVICES WOULD BE TAXED

The State House News Service reported that legislators may clarify the definition of computer services in the proposed new tax:

“Senate Ways and Means Chairman Stephen Brewer also said legislative leaders intend to make their intent clear to the Department of Revenue to make sure the software sales tax provisions aren’t too broadly interpreted, and stand ready to clarify the law if necessary in the future.”
We anticipate that the Massachusetts Department of Revenue will issue regulations and guidance on the scope of the new tax. We await the likely passage of the bill and the guidance and regulations from the Department of Revenue.

SOURCES

Michael Farrell, Tax plan’s sting felt too late by tech sector. The Boston Globe, July 18, 2013.

Elena Malykhina, Massachusetts Computer Services Tax Riles IT Industry. July 19, 2013.

Michael Norton, Matt Murphy and Andy Metzger. “Tax Bill Delivered Back to Patrick with Veto-Proof Support.” State House News Service, July 18, 2013.

Martine Powers, Mass. House brushes aside amendment proposed by Gov. Patrick to transportation funding bill. The Boston Globe, July 17, 2013.

Martine Powers, “Patrick vetoes transport bill; lawmakers could override.” The Boston Globe, Saturday, July 20, 2013, page B1.

The Associated Press, “Mass. Lawmakers to consider transportation veto.” The Miami Herald, July 22, 2013.

We thank Mr. Farrell and Ms. Powers, both reporters from the Boston Globe, for answering our questions by email and for providing sources used in this blog post.

Posted July 22, 2013 by Mass Tax Lawyers in Uncategorized

Tax Legislation: New Software Tax Passes in Massachusetts House of Representatives   Leave a comment

The Massachusetts House of Representatives passed a new software tax as part of the transportation finance bill, H. 3535.  On July 17, 2013, the House passed an amendment to negate all the changes proposed by Governor Deval Patrick, who is seeking additional tax increases.  The Massachusetts Senate also passed H. 3535 without making any changes, according to an email message from Martine Powers, a reporter with the Boston Globe.  The bill proposes to pay for state transportation projects by increasing several taxes. 

The bill now proceeds to Governor Patrick, who might veto it.  The legislature would likely override the governor’s veto.

LEGISLATIVE BACKGROUND

Massachusetts General Laws, c. 64H s. 2 provides as follows: “[A tax] is hereby imposed upon sales at retail in the commonwealth, by any vendor, of tangible personal property or of services performed in the commonwealth at the rate of 6.25 per cent of the gross receipts of the vendor…”

What are “services?”  The statute defines “services” in Massachusetts General Laws, c. 64H s. 1.  Section 49 of the bill (H. 3535) amends the statute so that the word “services” will include “computer system design services.”  Section 48 of the bill amends the statute, c. 64H s. 1, to add the following definition:

“Computer system design services,” the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party.

It follows that “computer system design services” will be subject to a 6.25% sales tax if the bill becomes law.

The “computer system design services” are sometimes called “cloud computing.”

OPPOSITION BY STAKEHOLDERS TO THE PROPOSED NEW TAX

Michael Farrell reported for the Boston Globe that the technology sector did not lobby strongly against the taxation of software services when the bill was first proposed in June, and it may now be too late to change the bill.  The bill has bipartisan support on Beacon Hill.  Governor Patrick opposes the House version of the bill on other grounds, but he supports the taxation of software services.

The Worcester Telegram opposed the tax in a staff editorial titled “Doesn’t Compute.”  That newspaper argued on July 8, 2013 that “we don’t need a new tax burden on the state’s most productive industries, including the life sciences, health care and finance.”

The Massachusetts Taxpayer Foundation also opposed the tax in a press release dated June 26, 2013.  The press release argues that the tax “strikes at the heart of the Massachusetts economy, costing countless jobs for years to come.”  The chart in the press release shows that computer services are subject to a full sales tax in only three other states: New Mexico, Hawaii, and South Dakota.

TechAmerica, the leading U.S. technology trade association, also opposed the new tax in a press release and a letter to the Massachusetts legislature.  Kevin Callahan wrote in the letter, “The proposed tax on computer system design services included in the transportation financing package…punishes businesses – particularly the technology sector.”

We do not express an opinion for or against the proposed new tax.

CLARIFICATION OF WHAT COMPUTER SERVICES WOULD BE TAXED

The State House News Service reported that legislators may clarify the definition of computer services in the proposed new tax:

“Senate Ways and Means Chairman Stephen Brewer also said legislative leaders intend to make their intent clear to the Department of Revenue to make sure the software sales tax provisions aren’t too broadly interpreted, and stand ready to clarify the law if necessary in the future.”
We anticipate that the Massachusetts Department of Revenue will issue regulations and guidance on the scope of the new tax.  We await the likely passage of the bill and the guidance and regulations from the Department of Revenue. 

 SOURCES

Michael Farrell, Tax plan’s sting felt too late by tech sector. The Boston Globe, July 18, 2013.

 Elena Malykhina, Massachusetts Computer Services Tax Riles IT Industry. July 19, 2013.

Michael Norton, Matt Murphy and Andy Metzger. “Tax Bill Delivered Back to Patrick with Veto-Proof Support.” State House News Service, July 18, 2013.

Martine Powers, Mass. House brushes aside amendment proposed by Gov. Patrick to transportation funding bill. The Boston Globe, July 17, 2013.

We thank Mr. Farrell and Ms. Powers, both reporters from the Boston Globe, for answering our questions by email and for providing sources used in this blog post.

 

Posted July 19, 2013 by Mass Tax Lawyers in Uncategorized

Filing deadline extended to July 15, 2013 for people affected by the Boston Marathon explosions   Leave a comment

The IRS sent out press release IR-2013-65 to remind Boston area taxpayers that the extended deadline to file their tax returns is July 15, 2013.

The extension applies to anyone who lives in Suffolk County (Boston) and all victims and first responders who were directly affected by the tragedy and unable to file their taxes at the original deadline in April 2013. It also applies to taxpayers whose tax preparers were affected.

Taxpayers who wish to take advantage of the extensions must call the IRS at the phone number given in the press release (see link above). Taxpayers who need more time may receive a further extension until October 15, 2013 by filing the standard IRS form for requesting an extension (Form 4868) by Monday, July 15, 2013.

For further details, please refer to the press release (see link above). As an aside, the New York Times recently ran an article in the Sports pages about Jeff Bauman, a victim of the Boston Marathon explosions who had both of his legs amputated.

This blog post is brought to you by the Boston, Massachusetts tax lawyers: M. Robinson & Company, P.C.. We will soon be starting a new blog page to be titled the “Massachusetts Tax Alert.” Please check our website in the coming weeks for a link to the new blog.

Posted July 11, 2013 by Mass Tax Lawyers in Uncategorized

$5 million Gift-Tax Exemption Sunsets December 31 of this year   Leave a comment

The $5 million federal gift and estate exemptions will only remain in effect until the last day of 2012. Normally the gift tax exemption is only $1 million dollars. This means that, for a limited time, high net worth individuals can make gifts of up to $5 million without paying federal taxes on the amount. A married couple may gift up to $10 million. These exemptions were part of the temporary deal President Obama made with Republican leaders to extend the Bush Tax Cuts in the form of the 2010 Tax Relief Act.  If the Democrats maintain control of the White House in the 2012 election, this exemption will almost certainly be slashed.  Gambling on the outcome of a contested Presidential election does not fall into the realm of smart tax-planning for you and your family’s future. Infrequently has there been such a need for sophisticated tax planning taking into account multi-generational considerations.

Owners of small businesses that generate over $1 million dollars a year should act now to make appropriate succession-planning arrangements that may not be available to you come January 1, 2013. Taxpayers that have not yet taken advantage of the increased exemptions are encouraged to do so either directly or through a trust, LLC or other legal entity.  Taxpayers that maximized their exemptions in 2011 are now able to gift another $120,000 ($240,000 for a married couple) during 2012 sans gift tax.

Posted April 12, 2012 by Mass Tax Lawyers in Uncategorized

M. Robinson and Company to SPONSOR this FANTASTIC event!   Leave a comment

The Newton Needham Chamber of Commerce

LAWYERS’ COUNCIL

presents

DANGERS AND PITFALLS OF ELECTRONIC RECORDS, DIGITAL COMMUNICATION, AND SOCIAL MEDIA –

 FOR LAWYERS AND OTHER PROFESSIONALS

What are you and your clients assuming about the current ‘state of the art’ of doing business in our increasingly digital world?  Come and learn about some of the dangers and pitfalls associated of what we increasingly take for granted in our brave, new digital business and professional world.

DATE:             Wednesday, April 4, 2012

LOCATION:     Cafeteria, 160 Gould St., Needham, MA.

TIME:              7:30 to 9:00 AM

REGISTER:     Online at www.nnchamber.com or call 617-244-5300, Ext. 2

$10 For NNCC Members/15 For Non Members

Presenters:

Jim Bolan, Esq. of the firm Brecher, Wyner, Simons, Bolan and Fox, LLP.  Atty. Bolan is a former Bar Counsel prosecutor and his practice includes representation of attorneys before the Board of Bar Overseers in Massachusetts.

John Marshall of the Massachusetts Board of Bar Overseers

Topics To Be Covered:

  • Dangers for attorneys and professionals in the use of social media, including Facebook, Twitter and LinkedIn.
  • Special care required in the use of email and other electronic communications
  • Website and Blog issues
  • Electronic date privacy and retention issues
  • Relationship of the above to the Massachusetts Rules for Professional Conduct and other codes of ethics.
  • Concerns growing out of the increased use of online credit card transactions and ethical obligations that accompany those transactions.

Posted March 7, 2012 by Mass Tax Lawyers in Uncategorized

Anyone who has foreign income or assets should read this article   Leave a comment

This article, FBAR Examination, Appeals and Collection Procedure in the Post-Amnesty World by Steven Toscher and Michel R. Stein warns that those who did not take advantage of the IRS’s OVDI program will face increased scrutiny.

Posted March 6, 2012 by Mass Tax Lawyers in Uncategorized