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Massachusetts Enacts 6.25% Sales Tax On "Prewritten" Software Consulting
First time accepted submitter marshallr writes "Technical Information Release TIR 13-10 becomes effective in Massachusetts on July 31st, 2013. It requires software consultants to collect a 6.25% sales tax from their clients if they perform 'computer system design services and the modification, integration, enhancement, installation or configuration of standardized software.' TIR 13-10 was published to mass.gov on July 25th, 2013 to provide the public a few working days to review the release and make comments."
Six days from the announcement of a new tax to being required to collect it? Really? How many businesses can change their processes that quickly?
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Massachusetts companies simply start providing software as a service or remote desktop usage into offices in other states. All the ones with big numbers they'd want taxed involved anyway.
captcha: shopped
Not sure I see a problem with that. Afterall, a reseller is a reseller is a reseller. Seems to me that it encourages creativity and innovation in those who wish to avoid the tax.
Time is what keeps everything from happening all at once.
Anyone hear of anything similar being considered in other states?
Developers: We can use your help.
Have gnu, will travel.
If you've followed the Detroit saga, you'll know that many states have made deferred pension deals with their unions that are now coming due as the Boomers retire.
Some states, such as Michigan have deferred liabilities of 241% of their annual revenue. Massachusetts is in the top 10 "bad" list (100%).(source of this is Moody's BTW, and this has been reported in The Economist)
What this means is that retiree benefits will take up an ever expanding part of state expenditures, crowding out education, police, fire, parks, and other benefits that modern citizens have come to expect.
So states are hungry for any revenue, Maryland for example, has set up a rain tax to tax people for the amount of rain that falls on their property (Maryland is in the top 10 "bad" list right next to Massachusetts), so the idea that they'd tax something in a completely arbitrary and crazy way will become the Normal.
You're about to see a wave of municipal bankruptcies all across this country, and local taxes are about to go through the roof.
Enjoy.
That could include anyone that installs linux on a box and then writes their own software on top of it, so pretty much any software developer who is working as a vendor to another firm.
Even I've heard of Taxachusetts and I don't live anywhere near it.
I am Slashdot. Are you Slashdot as well?
The application of the sales and use tax to Computer/Software Services will not apply to personal or professional services that do not themselves constitute computer system design services or software modification services and that are not directly related to a particular systems integration project involving the sale of computer hardware or software. Examples of such non-taxable personal and professional services may include (a) consulting and evaluation services with respect to existing computer systems to identify deficiencies and needs, and (b) services to prepare a business to use modified software, such as training.
Now I have no idea what that means, but I'm betting that that (or one like it) is one that was negotiated with the management of IBM and Microsoft to ensure that the tax won't apply to them.
So will pay the tax? Yup, the little guys.
BTW Mass. government employees, including state legislators, enjoy generous lifetime pension benefits of the sort that started vanishing in the private sector some 30 years ago. Those programs don''t come cheap.
When do we get to stop trying to punish/reward various industries by taxing them irregularly. Why can't this be covered by a generic "business" or "consulting" tax, rather than be industry-specific?
As a resident of Virginia, where taxes are low and there a lot of good software engineers employed tenuously in the government contracting business, I'd just like to say thank you to the Massachusetts legislature. Send your people here, have them write an interstate contract enforceable in Virginia not Massachusetts and reap the savings!
I see you haven't noticed but politicians spend more, no matter what the tax rate.
I trust you are consistent: The Titanic needs more icebergs, crackheads need more crack, Barbie needs bigger boobs.
No brain, no pain.
So why do they want to enforce making it more expensive to have secure computers ?
Why only on computers ? why not a sales tax on for example plumbing ?
Cause everyone needs to take a dump so should be a profitable tax.
However since its only on standard software and open source is nonstandard
I'm gonna presume its just a tax on those selling Microsoft software admin services.
Just saying it like it are.
Look, I will be the first to admit I did not RTFA, but I don't see anything wrong with this. Not because I am for government taxes, but if they are just taxing software sales, then it is just closing an existing loop. I see it like this. Me, as an individual go to best buy and buy windows 7. I get taxed on it. As a corporation, I buy windows 7, and I am not taxed on it if I purchase a $10k from their consultants to configure it. It is a win-win for MS and companies. No taxes paid, they get $10k in configuration and MS gets an additional $10k in revenue. This is the hole they are closing. If you buy software from a company like Oracle, MS, or many smaller houses, you pay taxes on it. When I was working for a consulting firm, this was the sale, especially when you are selling $300k worth of software.
Now if they are saying that they have to collect sales tax on the $10k - that I disagree with.
Captcha: Untested :)
It can be tough to keep taxes low when your federal taxes prop up states that take more money from Washington than they pay into the system. That includes your beloved Virginia:
http://www.economist.com/blogs/dailychart/2011/08/americas-fiscal-union
The sales tax should be on the software, not on the additive consulting or installation or customization charges.
Follow the money. Government just wants your money.
(-1: Post disagrees with my already-settled worldview) is not a valid mod option.
We're just over the border, and we promise not to pull any shit like this on you.
Why? It's simple: http://freestateproject.org/
Detroit is not a state, it's a city which managed to shoo all its manufacturing jobs away. Now Massachusetts is going to shoo all jobs away to India.
I think I know the origin of this tax bill and what it is intended for.
Acquia - http://www.acquia.com/ - is a large firm that specializes in Drupal. A lot of the work they do is around setting up, configuring and maintaining Drupal websites.
While they don't produce the majority of the code that is in Drupal, they do provide a lot of services around it to consumers and other businesses. This is really a tax on VARs and other people who implement Drupal using their services.
I am sure there are a lot of other companies that operate in a similar space. While I don't like it, I can see the potential revenues to be drawn in through such a tax.
I still have no idea what it means.
Here in Texas, services are not considered a "sale". I'd have to provide some kind of product for consulting to be taxable here. It's why I keep no inventory, and I require my clients to acquire their own hardware (I'll gladly tell them exactly what they need).
In SOVIET RUSSIA... erm...NSA AMERICA, the Internet logs onto YOU!
The tax is on software consultation, not programming.
"Prewritten software consulting"? It's like the double rainbow of taxes: what does it MEAN?!
nuff said
rewriting history since 2109
You know what I love to read about? Americans bitching about their taxes. Their infrastructure is falling down all around them, their schools, police, fire departments, utilities, etc. are all chronically underfunded. But lawdy lawdy, don't dare raise their taxes to try to FIX some of this stuff. From the outside looking in, all this complaining just seems so... what are the words? Stupid and shortsighted.
planet texture maps and more
They want to shift the tax burden to poeple not living in Massachusetts. Most of the income is earned out of state. (California)
The phrase "configuration of standardized software" sounds a lot like "using a cash register" to me!
This is likely a maneuver against such tax-sheltering movements. By taxing consulting you remove some of the incentive to use consultants versus having in-house employees. Not much, but it's there. Chances are if your consultancy wants to do business with an MA company they will be subject to this tax on their services.
And have you paid your property taxes yet?
But what this hurts is the small to mid-size shops that cannot afford in-house employees for their various IT services.
The trend is for states to make services taxable. This is just one slice of the salami in that direction. I can't think of a way to distinguish standardized software consulting from any other kind of software consulting.
This all sounds overly specific.
Troll is not a replacement for I disagree.
So that state will simply loose ANY income tax it gets from software consulting. Finance guys ain't stupid and don't lack creativity. All consulting business (or at least invoicing part of it), will be moved to different state or completely offshore. Netherlands? Lichtenstein? Eastern Europe?
I certainly dont do business there but I have been there, and its an unhappy place, home to unhappy people. Telling me I have to jump through extra hoops for Massachusetts is like telling me I have to do something extra for say selling my services North Korea. I certainly do not do business there either so why should I care.
... While I don't like it, I can see the potential revenues to be drawn in through such a tax.
Please make a distinction between "rational" and "good".
"Rational" is when someone does something for a reason; in this case, we can "see" the reason as "getting more revenue".
"Good" speaks more to the overall intelligence of the decision. The value of the decision in the future, or taking the whole situation into account.
In this case, the decision is "rational", but not "good". It ignores the underlying problems of runaway government spending, oppressive regulation, and economic viability.
Cities are failing not because of unreasonable pensions, but because of corruption in times past, unreasonable growth beyond what was needed, and mismanagement. Detroit's problems arose because population fell by 1/2 over the last 20 years, and government didn't shrink to compensate. People left Detroit in droves because it was simply a bad place to be.
This was so obvious it was a cultural meme: Note this clip from "A Fist Full of Yen" (released in 1977!).
When your city is so badly run, when the environment is so awful that businesses and people start leaving in droves, you might want to take a hard look at your management. What's the popular meme for Massachusetts? Is it "efficiently run, strong infrastructure, personal freedom, and business friendly"?
... While I don't like it, I can see the potential revenues to be drawn in through such a tax.
Pointing out the rationality of the decision lends it a measure of respectability. It defuses popular sentiment against the decision, saying essentially "don't complain, it's reasonable".
You should still complain. It may be "reasonable", but it's not in any way "smart", or even "good".
Move to New Hampshire - it's got a different meme.
The tax applies if your clients live in Massachusetts, regardless of where you live. If you're a Massachusetts programmer, you want to make sure your clients live out of state.
Of course, that assumes it's obeyed at all. Massachusetts also has a 'use tax" that says if you buy items out of state and use them in Massachusetts, you need to pay Massachusetts a tax on their use unless you paid a sales tax where you bought it. So, in theory, suppose you drive north to New Hampshire and buy a chair. You then put the chair in your Massachusetts home office. You now owe Massachusetts a tax to use your chair, so you write out a check for 6.25% of the cost of the chair and mail it to the Department of Revenue.
Compliance with the law is not widespread.
The tax isn't on programming. It is on the sale of software and the sale of servicing software. If you do everything in house in MA then you don't pay any tax. The whole point is to tax people working in NH, CA, and TX.
Consultants can largely solve this problem by having customers declare explicitly that the work doesn't fall in the realm of taxable services as defined by the ruling.
There's so much ambiguity in the wording that as long as you're not in the crosshairs of being a reseller who supplies expensive software (think Oracle, not so much Windows) in the guise of a (heretofore) non-taxed service, you'll be fine. It's not worth their time to enforce it otherwise.
The key is being creative. Supplying customized Drupal installations? No, you're writing unique software to customer specifications for the customer to use with their existing Drupal platform. And maybe you're supplying training about operation and installation of Drupal systems. And helping them evaluate their business needs that might be met by aforesaid custom software. The ruling (section II) even explicitly exempts "training" and "evaluation". Maybe a small fraction of your business might fall under the ruling, but if that's the case, you just need to make sure it's covered by separate contracts. If there isn't significant money flowing out of your business for (reseller tax-exempt) software that your customers eventually get, it will be pretty challenging for the DOR to argue that your business is taxable... as long as you're smart about how you define the business.
I'm as worried as the next fellow about jackbooted thugs from the government running my business into the ground. However, the reality here is that these are overworked civil servants who are motivated by meeting their goals--and they'll do that by pursuing the cases that the statute is intended to target, because those will be most likely to generate revenue. No bureaucrat wants a lawsuit, they want passive compliance. Maybe ten years from now, it will be different, but if it is, I'd bet it's because the law is expanded (to cover all services, in the name of "fairness"), not because this statute is egregiously misinterpreted.
And have you paid your property taxes yet?
Yes, and gladly.
New Hampshire is always ranked one of the lowest states in overall tax burden: frequently the lowest, usually in the bottom three.
Massachusetts is always one of the highest, always in the top 10. (Citation)
So yes, I pay my property taxes, and they are unbearably high.
Are you saying that paying more overall is good, if it lowers property taxes?
What exactly is your point?
Excessive taxes in California years ago led to many moving to Texas, Colorado, New Mexico, etc and taking their business with them. Massacheusetts needs to learn that Tax can be a Weapon of Mass. Destruction. Don't think it would cause any? When they left California a lot of the nutty politics came along with them. Kind of like remora.
In New Hampshire....
Yea but you can control that by owning less. Your income is not as controllable as the material possessions you own.
And this occurs in the same state where the original Tea Party took place? How convenient that they forget their own history.
In maryland 2008, and the Best Buy "Geek Squad" got the law repealed. We should to the same here in MA.
Unless lawyers, plumbers, etc. also charge service tax, I don't want to charge my clients service tax for writing software for them.
http://youtu.be/SF8MB5_2QHI
'Nuff said
How do the NH Business Profits Tax and the Business Enterprise Tax compare to the 6.25% MA Sales Tax?
I've read the law, and the advice from the DOR. It's hard to know, the law is vague. "Modifying, enabling, "pre-written" software" is what they say. Who knows what they mean by that. I often "consult" with clients before I write the software.
Maybe the poor will figure out ways to make more money and be more productive. And if they do not, at some point we have to leave them behind. We are progressive after all, and they are just slowing us down.
He famously quipped that he could slap a tax on a galloping horse. You have to feed the vast patronage & pork machine in Mass, after all....
Go read up on New Hampshire, where exactly this happens.
They have a heavily modified income tax and no sales tax, and then indeed they do smash it into property taxes.
Draw your own conclusions - it's far from problem-free.
My first Journal Entry ever, in 8 years! http://slashdot.org/journal/365947/aphelion-scifi-fantasy-horror-poetry-webzine
No, this is a NASTY new tax.
The huge case is when the software is cheap and it's all in the support!
Typical examples are OEM/self bought Windows and Quickbooks. The raw software is pretty cheap - but the consulting could be thousands. So suddenly they want a *sales* tax on it? I already bought my software a month ago (for example). Now I have to pay a *sales tax* on a *service*?!
Plus there are really evil clauses in accounting theory that kick in here. If these are "sales" and not "services", that's gonna have a colossal impact on the IRS Schedule C as someone else hinted at elsewhere. I think it changes if you can use Cash Based Accounting vs Accrual, and if you have Sales, you have the Inventory clauses kicking in.
My first Journal Entry ever, in 8 years! http://slashdot.org/journal/365947/aphelion-scifi-fantasy-horror-poetry-webzine
I guess this applies to busnisses that make computers then put lionux on it. Despite the fact that they don't pay for linux.
The point is only to make sure people aren't confusing "no income tax" with "no tax", and you've now provided a more clear picture of the NH tax situation than the OP, so mission accomplished.
Last time I checked, professional services were not taxed in the USA. My company has **never* collected sales tax for services. We pay taxes a different way.
The company provides computer consulting services only. We do not resell anything. We advise our clients what should be purchased to fit their needs, so other companies handle the sales tax. We compete against IBM and Accenture and are hardware agnostic. This is why clients choose us over all the providers in-bed with specific hardware companies.
We work all across the USA, but will probably not accept any work in MA again. The overhead of dealing with a tax that was never seen before just isn't worth the hassle. We have plenty of work elsewhere.
Further, I can see companies moving their IT hosting out of MA to avoid this tax - how many companies can afford a 6+% tax in addition to all the other corporate taxes paid? 6% is about all the profit we make.
BTW, we are not low end Microsoft consultants. We only deal with MS stuff as a last resort - most of our work involves UNIX/Linux, Security design and networking.
Screw you MA government.
I don't do any of that ('computer system design services and the modification, integration, enhancement, installation or configuration of standardized software.'). Everything I do is "training", even when no students are in the room !!!
I pay my property taxes every six months and they are pretty high but in the ballpark of nearby MA cities. It's not as if MA doesn't have property taxes in addition to high income and sales taxes.
So, I am supposed to charge sales tax for a service that I already pay Social Security, Federal, State, and Local income tax on?
How do the NH Business Profits Tax and the Business Enterprise Tax compare to the 6.25% MA Sales Tax?
Poorly, which is why there's jack shit for high tech in NH.
Just to put some numbers on this, I live in Nashua, and our property tax rate is $21.49/$1000 of accessed value, a nearby MA town, Westford, for example has a rate of $16.10, so I'm paying around $1000 a year more in property tax then if I had the same accessed value house in Westford. Which is a lot, but a lot less than I was paying in MA income tax for the privileged of driving all the way to Cambridge every day.
Time spent becoming active in the governance of my country is time taken away from programming.
If I were a consultant and/or operated a tech-related business that sells or provides services in Massachusetts I'd be on the first train out of there. This is going to tank their economy and drive out a lot of modern business and workers, it's the anti-silicon valley. Can you imagine contracting, which is a self-owned business and falls under this law, then suddenly you owe state sales tax on any services you provided as a natural part of doing your job like configuring a web service or a piece of software? It's just insane.
Applying sales tax to anything BUT the merchendise (i.e. NOT labor of any kind) is labor/income tax. Which, if you've read up on the history of income tax, shluldn't be legal in the first place.
This whole ideal about trickling/sneaking/forcing in legislation regarding either establishing or increasing taxes of any kind is immoral and we should be ashamed of allowing it to get this far.
We can't just prune this tree, we have to cut it down.
There, I said it.
(I am an independent technical consultant in California, so this especially hits home for me..)
It is pitch black. You are likely to be eaten by a grue.
This will just cause companies to move their data centers out of state to avoid the tax. If you have a $100,000,000+ SAP implementation the tax can add up quickly.
And now you can kiss what's left of the "Massachusetts Advantage" goodbye. Welcome to the Silicon Deathbed.
I have to wonder if the increase in revenue from this will offset the loss in revenue as income and sales moves out of state. In the short term it will but in the long term this will definitely be affecting many business decisions.
sales tax on labor to provide a service? that's hardly new. many states collect sales tax on many different types of services, from hair cuts, to auto repair, to web design... and yes, even the services massachusetts will be collecting tax on now -- it's taxable here (different state) and requires minimal paperwork for us (quarterly return and remittance.. can be a mailed paper form, via internet or even via old-school push-one-for-this-two-for-that touch tone phone system).
the ONLY thing that's remotely "newsworthy" here is the short amount of time (7/24 to 7/31) between law passage and effective date. WTF massachusetts? ever heard of a little notice and lead time? 3-6 months would have been better than one week.
To my knowledge most states don't tax for services (especially not as highly as sales are taxed). Have you ever heard of a musician or lawyer (or even your aforementioned chef or beautician) having to collect any sort of sales tax?
Massachusetts is no longer one of "most states". Massachusetts will begin charging sales tax on services performed by computer consultants. It has nothing to do with hardware or software sales, the 6.25% sales tax is for services such as repair, installation, configuration of computers and or software RTFA FFS!
I currently live and work in Cambridge and I'm curious, how far is that drive and how long does it take you?
I have found there are just two ways to go.
It all comes down to livin' fast or dyin' slow. -REK, Jr.
How about a tax on political corruption? I'm sure that the next time Senator Blunt of Missouri takes a $62,000 bribe from Monsanto Corp that the state of Missouri would just love to get 6.25% of that. Just imagine, with the level of corruption in American politics today all the states would soon have billions of dollars a year in excess revenue.
It's funny, I know a lot of people who live in NH but work in MA and pay state income tax here. This tax will hit people in NH if they work in MA.
Just point me to a programming job where I can make 140K with .NET and C#, I'll pack my bags now.
I used to work near the Alewife T station which is at the extreme West end of Cambridge and it took about 37 minutes door to door if I avoided rush hour. It would be much longer if you were going to the MIT or Harvard areas. Another developer I knew back then took the train all the way from Exeter, NH but that was insane to me at 1.5 hrs each way.
"computer system design services and the modification, integration, enhancement, installation or configuration of standardized software".
"No problem; we only did one of those, not both..."
Surely it is possible to provide a service (not subject to sales tax) without also transferring property (subject to sales tax)?
When someone modifies or enhances open source software, the licensing agreement is between the client and the publisher. The consultant does not authorized to license the software. So they are not an agent or reseller... As far as owning or licensing the product is concerned, WE DO NOT EXIST. Why should we be taxed on it?
This is not "Taxation Without Representation". This is "Taxers Gone Wild."
Maybe things are changing, but shouldn't sales taxes be for tangible goods?
That a compiler and its libraries are treated as 'standardised' software (it is)
and
that source code represents the modification integration enhancement installation or configuration of the compiler and its libraries... (rather more debatable, but possible)
Well, unfortunaly it is just too difficult for them to simply take there work elsewhere. Ohhh well. Let Larry Kudlow have his way with our city.
He is crazy if you think about it; I am not.
I'm surprised that so many people on a tech-savvy site like SlashDot don't "get" the problem here.
The problem with the new law is that it applies to certain modifications, enhancements, and integration work, but not new custom code, and it's unclear how those terms will be interpreted.
I'm an independent software contractor in MA. I mostly write custom code in C# and Java for paying clients but sometimes I might need to integrate a third-party library, say for database, communications, graphics, etc. What parts of that work are taxable is unclear. The Department of Revenue has released an FAQ to clarify things but it's had the opposite effect by showing just how complex and filled with corner-cases the law really is!
A sales tax on a retail product, say a computer monitor, is simple - multiply the price it's sold at by 6.25% and that's it. A dozen observers would all agree on the same number. But a dozen observers watching what I or any other independent contractor do would come up with a dozen different numbers for what parts of the work are taxable! Add a few lines of Java in this file and it's probably taxable, add the same code in that file and probably not. I can imagine situations in Android where if I import an open-source graphics class I would have to charge tax for making changes in the Java file but if I could accomplish the same result by making changes in the XML file for which that Java is the code-behind, it wouldn't be taxable! This is a law about software design written by a bunch of politicians who've never written a line of code in their life, and probably never had to run a small company in their life.
So now, even though MOST of what I do is new, custom code, so it's not taxable, I have to keep much more detailed records to record the parts that are - or MIGHT be. I also have to register with the state to file and pay sales tax and then file every month even thought most of those months with be for $0. And I have to change the way I invoice work to my clients and collect and hold the sales tax receipts somewhere until I pay them. So it tremendously complicates my paperwork and overhead.
Most of the pushback on this law is not about the money - I can just pass that on to my clients - it's about the complexity, paperwork, record-keeping and bureaucracy that it creates.
"It takes me about 5 minutes to change all our software to a new tax rate and that's in 5 different software suite. If they're all such a great IT consulting firms, maybe they should be able to as well."
You obviously haven't read the new law. It only applies to CERTAIN software services. And the work it applies to is typically mixed-in with other work. For example, recently a client asked me to add some enhanced graphics features to an Android device they sell. I used an open-source graphics class to do this. Under the new law SOME of that work, namely integrating it into the client's build, replacing some of the old method calls with new ones, etc, would be taxable. SOME of it, like exposing new user-visible features that used the new class would NOT be taxable. And SOME of the work would fall into a gray area where it's unclear whether it's taxable.
That's the problem with this law - it's a not a simple matter of just adding a flat 6.25% to the invoice. I've already discussed this with my accountant and my lawyer and they both threw up their hands and said it will require years of case law before anyone will really know exactly what work is taxable. It's an insane law written by politicians who've never written a line of code in their life.
"the ONLY thing that's remotely "newsworthy" here is the short amount of time (7/24 to 7/31) between law passage and effective date."
This is factually incorrect. I wish people who post on this topic/thread would READ THE LAW we're discussing!
The problem with this law is that it only taxes certain activities that software engineers do and the definition of those things is vague, subjective, and unclear. So it puts software engineers whose expertise is supposed to be in C#, Java, Linux and SQL in the position of having to collect and interpret the tax code!
If the entire service of software engineering were taxable then it would be simple - I would simply hand an invoice to my client with a 6.25% sales tax added on the bottom.