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Client Alert #26 New Mass Sales Tax on Computer Services

Please read this entire alert!

The New Law

You may have heard that the Massachusetts State Legislature recently passed new legislation relative to transportation finance. What you may not realize is that included with this law is a new tax on computer and software services. This law went into effect with 7 days notice on July 31, 2013 and affects how Call Andy! does business with you, our client.
 
First, some facts: The Massachusetts Department of Revenue has posted an article detailing the facts of the new law on this page: TIR 13-10: Computer and Software Services Law Changes. In addition, they've provided a more plain language FAQ here. This initial FAQ is essentially incomplete, but it does provide a framework for what the DOR is intending on taxing.
 
Basically, much of what we at Call Andy! do is now taxable at the standard MA sales tax rate of 6.25%. This includes most of the services you've seen us provide during our routine visits:
  • Installing software
  • Upgrading your computer
  • Customizing your software and configuration to best meet your business needs
  • Designing and installing your network
The as yet incomplete details of what is and is not taxable is outlined in the two links above. Based on our own knowledge of how we work for you, and the way we accomplish the variety of tasks we undertake, it is clear from our experience that we often switch back and forth between activities that would be considered taxable and nontaxable. Unfortunately, breaking down our activities while working with our customers into discrete slices of taxable and non-taxable segments is not feasible in terms of efficiency, time tracking or billing. To do this might require us to change taxable statuses several times per minute. Even so, the reality is that the majority of our business activities are now considered taxable under the current law. Our goal is to work for you in the most efficient and expedient manner, providing the best possible value for our services.
 
With that in mind we've determined that our best response to this new law is to treat our services as follows:
 
Non-taxable Services:
  • Initial customer or project evaluations: These visits generally consist of walking through a customers' site, evaluating and inventorying their systems and network. We also spend the time interviewing users, inquiring about various services and business uses, and discussing plans, options and solutions. When doing these types of evaluations, we never make any changes to hardware or software. We don't install any applications or utilities for customer use.
  • Pure consultation or training of an hour or more: By this we mean planning or strategy meetings, discussions of various options, and training sessions for end users. No changes are made to hardware or software, no customization is occurring. No new software is installed. 
 
Taxable Services:
  • All other billable time: Virtually all other activities that we engage in is taxable according to the language of TIR 13-10.
 
We recognize that this policy on our part may seem somewhat arbitrary and broad, but it's what we've been advised to do until there's more clarification, either from the DOR or the Legislature. Therefore, until such time that the law is modified, this is our updated billing policy, and all customers will be billed based on this policy. This is simply based on the fact that current law as written is vague and leaves many questions unanswered. In spite of this, we as service providers are expected to collect these taxes and forward them to the state. As such, we are taking a conservative approach and erring on the side of caution. Please note that this only applies to work done within the state of Massachusetts. Clients outside Massachusetts are not subject to this tax, unless the work occurs within Massachusetts.
 
Moving Forward
 
Not surprisingly, this new law has generated a lot of discussion within the IT community, and we've begun to provide feedback to the DOR and government officials. To be clear, it represents the first sales tax on professional services in the Commonwealth. It is obvious that current law as written is vague and leaves many questions unanswered. Andy was recently invited as an industry leader to participate in a discussion with other business representatives along with DOR representatives that included the Deputy Commissioner of the DOR, and the Chief Legal Council of the DOR. The purpose of the meeting was to illustrate to the DOR the impact of the law on our businesses and to highlight the ill-defined aspects of it. Andy will continue to work with the DOR when asked to provide clarity and recommendations as they continue to review this issue. Additionally, we plan to do what we can with the State Legislature to get clarification as well as encourage them to amend or repeal this law. In the short term,  as a result of that and other meetings, we expect that the DOR will update their guidance on the specifics of the law.
 
In addition, we plan to work alongside various organizations to request that the legislature amend or repeal the law. Much of this effort is discussed in this excellent article in the Boston Business Journal: Business lobbyists to petition for new software tax's repeal. Please consider signing the petition to Repeal the tax on IT services at Change.org. You can also contact your legislator to share your opinion on the new law.
 
If you have any questions about how this affects you, please don't hesitate to contact us. If your organization is a tax-exempt non-profit, please forward a copy of your tax-exempt status to us at bookkeeper@callandy.com.
 
As always, thank you for your continued reliance on us as your Mac IT resource.


Andy, Rob and Max
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