Wednesday, July 31, 2013

Re: TIR 13-10: Sales and Use Tax on Computer and Software Services Law Changes Effective July 31, 2013

to: 'rulesandregs@dor.state.ma.us'
 

Dear Sir(s) and/or Madam(s):

Please accept this Email as both a formal request to the Massachusetts Department of Revenue (DoR) for specific guidance in the application of the new regulation, as well as a plea for a rapid amendment to implement a more reasonable grace period.  I believe that while the regulation may be more straightforward to implement by businesses exponentially larger than my own, it produces  incredible complexity for small business consultants in a manner that may not have been taken into consideration.

I would welcome the opportunity to discuss this directly with the appropriate parties.

Sincerely,

David A. Winter
________________________________________________

David Winter, MCSE, CEDIA-II – Principal Consultant
Winter Solutions: Hand-on IT Management Services & Consulting
   for Small Business, Non-profit & Education
 
29 Harold Street, Sharon, MA 02067
dovid@wintersolutions.com - 781 821-0000


While perhaps larger businesses have known about this for some time, the first I heard about this was several days ago. I’m not aware of having received any letters from the DoR seeking input. I saw nothing about it in trade publications and received no industry organization alerts. It was a friend in a totally different line of work that happened to read a news article about the legislation. At first, I thought he misunderstood and was referring to the Mass DoR determination on Software as a Service, but after research, I finally figured out that he was correct. I’ve tried my best to understand TIR 13-10, but I find it vague and confusing. I could understand having a few months to request determinations, notify customers, and put processes in place. I don’t understand how I’m supposed to process all of this so quickly. If I under tax, I risk audit and penalties. If I overtax, I risk losing customers and business.

Most of my clients are small/micro-businesses themselves. They’re struggling to dig their way out of the recession and rely on their systems to keep their employees productive. They’re pressuring me to reduce my costs already. Where is this 6.25% going to come from? I’m still digging myself out of the recession, struggling to keep my home and going to the nth degree to ensure that I do my part to meet my fiscal responsibility as a grateful citizen of the United States and the Commonwealth.

I am a small shop, as are many of my peers. There is no accounting department. I engage in little to no resale as I don’t have the infrastructure to manage the buying, purchase orders, billing, inventory, shipping receiving, and returns. When sales tax is due, I gladly fulfill my obligations to collect and report it quarterly, but as a micro-business, I have no choice but to keep things simple if I want to survive. We rely on relationships with third party vendors who’s only compensation to us is that they provide our clients with reasonable prices and quality customer service. We engage in resale only in the rare event that there are specific benefits that we can only obtain through a direct reseller relationship with the vendor.

My major request as referred to above is that the DoR provide a 5 month grace period (until January 1, 2014) for small technology providers to:

·         request determinations on the applicability of the new tax regulations

·         notify customers of the implications of these new regulations

·         allow time for renegotiating contracts and budgets as needed

·         put systems in place to bill for, collect and submit sales tax
(many of my peers don’t engage in resale and thus don’t currently collect sales tax)

 It is my understanding that the intent of this tax is to effect services that are traditionally associated with the sale of software and hardware (e.g. by integrators), but the details of the document seem to indicate that the tax may apply to a wide array of computer related services even when they are unrelated to the sale of tangible goods. I will attempt to break down the pieces of my business and am asking for a ruling as to which of the items are subject to sales and use tax under either the new or existing regulations:

I am certain that this list is incomplete, but given the short time for comments, I’m trying my best. As noted above, we are not generally in the business of reselling tangible goods.

Please note that individual sub-items represent different ways that the services are offered. The question is whether or not the service offering is subject to sales tax if offered under the specific circumstance outlined in that line item.

1.       Website related services:

a.       Website hosting services

                                                               i.      Where the customer has no access to the website administration.

                                                             ii.      Where the customer has access to administration of an  open source website content management system (CMS) through a control panel (e.g. Joomla or WordPress).

                                                            iii.      Where the customer has the ability to configure some aspects of the hosting, but has no access to configure the server itself as it is a virtual or shared environment (e.g. WHM/Cpanel).

b.      Website design and development services

                                                               i.      Graphic design services and implementation of a static brochure website.

                                                             ii.      Graphic design services to build a template for an open source CMS based website.

                                                            iii.      Setup and configuration of a basic open source CMS driven marketing website.

                                                           iv.      Setup and configuration of an open source CMS driven website application (with no custom development).

                                                             v.      Maintenance and support of existing websites that were developed and/or hosted by us.

                                                           vi.      Maintenance and support of existing websites that were developed and/or hosted by a third party.

c.       Website consulting services

                                                               i.      Preliminary meetings to discuss website and marketing strategy.

                                                             ii.      Meetings to discuss website and marketing strategy related to projects being performed by us.

                                                            iii.      Meetings to discuss website and marketing strategy related to projects being performed by a third party.

                                                           iv.      Meetings to discuss website and marketing strategy that are unrelated to project work.

d.      Web marketing services - Assisting clients with advertising and marketing their services utilizing a variety of third party free or paid services, where the client procures such services directly from the third party vendor, such as:

                                                               i.      Advertising networks (e.g. Google AdWords)

                                                             ii.      Email marketing engines (e.g. Constant Contact)

                                                            iii.      Issuance of press releases (e.g PR Web or OpenPR)

                                                           iv.      Search engine optimization services

2.       Software as a Service (SaaS):

a.       Microsoft Exchange Email hosting services in a virtual or shared environment where we outsource services to a third party data center, license ownership is maintained by the data center, and neither we nor the client have access to the underlying server platform, and all administration of mailboxes and basic settings is performed us.

b.      Microsoft Exchange Email hosting services in a virtual or shared environment where we outsource services to a third party data center, license ownership is maintained by the data center, and neither the client nor us have access to the underlying server platform and the client has limited access to  administration of mailboxes and basic settings.

c.       Cloud backup services where:

                                                               i.      We resell the third-party cloud backup service itself (such as Mozy, Carbonite or Acronis)

                                                             ii.      Implementation services related to a cloud backup service that we resell to the customer.

                                                            iii.      Implementation services related to a cloud backup service that the customer purchased directly from the third party service provider where:

1.       We receive referral  compensation from the service provider.

2.       We have no financial relationship with the service provider.

d.      Consulting services related to third party database management systems such as customer relationship management (CRM) systems (e.g. SalesForce, NetSuite) and other vertical market applications where the customer contracts directly with the third party and does not have access to the underlying platform:

                                                               i.      Initial strategy meetings

                                                             ii.      Product selection

                                                            iii.      Vendor negotiations

                                                           iv.      Internal project management and implementation

                                                             v.      Ongoing product support

3.       Information technology  consulting and support services related to third party hardware or software purchases

4.       Backup and disaster recovery services:

a.       Implement backup processes utilizing components that the customer newly purchased from a third party.

b.      Reconfiguring backup processes utilizing components that the customer already owns.

c.       Monitoring the ongoing performance of the backup systems.

d.      Disaster recovery services where we:

                                                               i.      Assist the customer with data restore services utilizing their backup media.

                                                             ii.      Assist the customer with recovering their data utilizing software tools that we own.

                                                            iii.      Engage a third party to perform invasive data recovery data in a clean room environment.

5.       Audio-video or control system consulting, implementation and management.

a.       Design of an audio-video system (e.g. conference room presentation system, home theater system)

b.      Implementation of an audio-video system that does not include computers

c.       Implementation of an audio-video system that includes embedded computers with no access to the operating system (e.g. Apple TV)

d.      Implementation of home or building control systems based upon embedded computers that have no access to the operating system (e.g. Control4, security system panels)

e.      Implementation of an audio-video system that includes a personal computer connected to a television

f.        Support for audio-video systems following the implementation.

6.       Telecommunications consulting

a.       Services to review telephone bills and refer the customer to a third service provider with whom we have no financial relationship

b.      Services to review Internet service bills and make recommendations to for third party service providers from whom we:

                                                               i.      Receive referral compensation.

                                                             ii.      Receive no financial incentive.

c.       Services to supervise the implementation of telecommunications services by a third party.

d.      Services to supervise the implementation of an internal phone system by a third party from whom the system was purchased.

7.       Preventative maintenance services

Month-to-month services to maintain existing personal computers and servers where the following items utilizing software tools that are licensed to us including the following:
*** The question is whether any of the individual items are subject to sales tax, beyond what is noted, and whether the taxability of the individual item, being a very minor portion of the overall service, impacts the overall taxability of the service, where the general nature of the services are connected to ongoing maintenance are have no direct connection to the sale or implementation of tangible goods. If an item is deemed to be taxable (e.g. antivirus software), would the maintenance service be taxable such software was billed as a separate line item?

                                                               i.      Antivirus software that is:

1.       Purchased by the client from a third party, but monitored by us

2.       Installed by us on the client computer though we retain the license as part of our maintenance program and the customer has no access to the administration

                                                             ii.      Computer clean-up software tools that are:

1.       Installed by us on the client computer though we retain the license as part of our maintenance program and are the only ones utilizing the software

2.       Not permanently installed on the computer and are only utilized while the maintenance is being performed

                                                            iii.      Remote access utilities (e.g. LogMeIn) where the remote access service is provided online (Saas) by a third party, but a small agent is installed on the clients’ computers and:

1.       We purchase the service from the provider, pay them sales tax, and utilize the software for exclusively for remote maintenance and support.

2.       We purchase the service from the provider, pay them sales tax, and utilize the software primarily for remote maintenance and support, although we provide end-users limited remote access to their computers as courtesy for no additional charge.

3.        The client purchases this as a separately billed service, pays sales tax and it is utilized for maintenance/support and remote access by the end-users.

8.       Ongoing support services unrelated to the purchase of hardware or software

a.       Ah hoc consulting which is paid at the time of or following delivery of services and is unrelated to any specific project or software/hardware implementation.

b.      Prepaid blocks of consulting time (e.g. 30 hours per monthly) not tied to a specific project that is generally utilized for support of existing systems, but may be utilized for small projects related to the purchase of software from a third party by the client (e.g. installing Microsoft Office for a new employee).

c.       Flat-rate monthly consulting (e.g. per user) not tied to a specific project that is generally utilized for support of existing systems, but may be utilized for small projects related to the purchase of software from a third party by the client (e.g. installing Microsoft Office for a new employee).

9.       IT management consulting

a.       Consulting services to guide a customer in the operation of their business by:

                                                               i.       Identifying the types of solutions that would address a particular business need.

                                                             ii.      Selecting a specific solution, negotiating with vendors, project management, etc.

                                                            iii.      Suggesting how existing systems may be better utilized, but making no new implementations. 

Additional questions:
 
10.   Do the taxes delineated in TIR 13-10 apply to 501c3 non-profits and other tax exempt organizations?

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