[Hidden-tech] Mass IT Tax discussion-FYI

[Don Lesser]

Below is the text of a letter I sent to Ellen Story, the Amherst State Rep,
regarding this tax. At the suggestion of several people who have read it, I
am posting it to this list FYI. I have a response from the DOR that I will
post in a separate e-mail.

Representative Ellen Story
State House, Room 277
Boston, MA 02133


Dear Ellen:

Please forgive both the length of this letter, but I wanted to be clear as
to the issues I've raised.

References

I have referenced the FAQ from the DOR
(http://www.mass.gov/dor/docs/dor/law-changes/faqss-computer-software-2013.p
df) in this document using "FAQ #" to reference specific items.

In the law as written, these are the applicable sections:

SECTION 48. ."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.

SECTION 49. . or data access, data processing or information management
services; and provided further, that the term services shall be limited to
the following items: telecommunications services, computer system design
services and the modification, integration, enhancement, installation or
configuration of standardized software.

Source: https://malegislature.gov/Bills/188/House/H3535. 

I have also referenced Commissioner Amy Pitter's letter:
http://www.mass.gov/dor/docs/dor/commissioner/commisisoner-pitter-computer-t
ax-letter.pdf. Boldface mine.

Issues Relating to My Business

The new sales tax is applied to computer systems design and the modification
of standardized software. Training, telephone support, and similar services
are not taxable. Apparently, custom software is not taxable. However, this
leads to confusion for my business:

1.	A client hires us to build an Access database. Access is pre-written
commercial software that is used to build databases. Is this considered
customization of pre-written software (taxable) or custom software
(non-taxable) written using a software tool on which applicable taxes
were/will be paid? 

2.	A client owns or purchases Microsoft Office and pays the applicable
sales tax. The client then hires us to install it (not taxable), train on it
(not taxable) and to design and build an Excel spreadsheet for their
company's use. Is this spreadsheet considered customization of existing
software (taxable) or custom software (not taxable)? 

3.	FAQ 36 states that software developed for a client and delivered to
the client who is billed only for hours of time is non-taxable. All of our
software is developed by contract for the client not developed in advance
and sold to the client. Are we considered to be providing non-taxable
software?

4.	The distinction between customizing of standardized software and
creating custom software leads to confusion when we work with a product like
Microsoft Office. Is using the build-in programming language or creating
reports and queries using the built-in tools customization or creation of
custom software? 

5.	Suppose we design a computer system for a client. We bill and
collect the sales tax in anticipation of the purchase of the software and
hardware needed. The client elects not continue with the project or to
continue with a different vendor. Based on FAQ #15, this is no longer
taxable. Are we to refund the tax to the client? Will it be refunded to us
by the DOR if the tax has already been paid?

Issues Relating to the General IT Industry

1.	Web developers have similar issues as to what part of their work is
taxable. The distinction between customization of standardized software
(such as WordPress) and development of custom programming seems to hinge on
the specific tool(s) that are used in the process.

2.	The speed with which this tax was implemented, plus the letter from
Amy Pitter, Commissioner of the DOR cited below, have presented IT
businesses with the task of determining applicable sales taxes with nine
days planning. The tax has presented the customers of these companies with a
6.25% increase of costs with the same nine days window. 

Most of our clients' budgets are prepared for a year. How do they and we
deal with this unanticipated price increase? 

"Let me just say, we know that there is a learning curve with this new sales
and use tax and that there will be a transition time to implement the tax
and collect."

Source:
http://www.mass.gov/dor/docs/dor/commissioner/commisisoner-pitter-computer-t
ax-letter.pdf. Boldface mine.

3.	IT companies that provide products and services, some of which are
now taxable, have been presented with the necessity of itemizing each
service and determining whether it is taxable with nine days' notice. If
they use software to prepare invoices and do billing, it must now be
rewritten or customized before an accurate bill can be presented.

Comments

Why are computer services the only services to which this tax applies?
Apparently a similar law that applied to lawyers and accountants was struck
down several years ago. Why does the Commonwealth choose to discriminate
against one of its more successful industries?

It is ironic that the purpose of the tax is enhancement of roads since a
large percentage of the IT services are provided over the Internet.

How does the DOR plan to deal with mistakes, under-reporting,
over-reporting, over-payments, and other similar issues made in good faith? 

The DOR has announced public hearings and clarification in October. What
will happen to good-faith efforts made prior to the clarification?

There are a number of editorials about the new tax that urge its repeal.
Some are linked to below:

http://www.wbur.org/2013/08/07/software-services-tax-repeal-effort

http://www.boston.com/businessupdates/2013/08/06/business-leaders-seek-repea
l-new-computer-tax/VmixEfifntycxuqM5UskFI/story.html

http://www.bostonglobe.com/opinion/editorials/2013/08/08/tech-tax-causes-con
fusion-and-best-fix-would-repealing/Veallei68JOpuqBjbeXYqJ/story.html

Conclusions

The key issue for businesses like mine is the distinction between standard
software and custom programming. Tools such as programming languages seem
clearly non-taxable, while software such as MS Access, MS Excel, Adobe
Dreamweaver, WordPress, etc. each of which can be used to build independent
applications are open to interpretation. 

Until we receive clarification, we are required to bill all our clients as
though our work was taxable. This presents an unexpected cost increase to
our clients and additional bookkeeping for us in addition to the time we
have spent trying to understand the new sales tax.

Senator Stan Rosenberg's office forwarded a clarification that specified
"that the sales tax does NOT apply to data access, data processing or
information management services." Is there a definition of these terms?

Based on the confusion as to which services are applicable, necessity for
public hearings, the lack of notice, and the sudden increase in costs to all
Massachusetts business who use computers, I would urge that the
implementation of the law be postponed until January 1, 2014, during which
time it can be clarified or otherwise dealt with.

Once again, I thank you for your time.  Please contact me if you have any
questions.

Sincerely,


Don Lesser
Pioneer Training, Inc.
139B Damon Road, Ste 8
Northampton, MA 01060
(413) 387-1040
(413) 586-0545 (fax)
dlesser at ptraining.com
www.ptraining.com