Massachusetts Introduces Software Service Tax
masslive.com
masslive.com
He thought he would reach out to some MA economic development organization and let them know what he was doing. They got back to him right away, I forget which exact agency, to let him know they would not be able to provide any help. He was kind of miffed because he hadn't asked for anything - but now he knew they would not be able to help no matter what he might need.
I tried to look up the agency he contacted and I found these agencies:
Commonwealth Corporation
MassDevelopment
Mass. Office of Housing and Economic Development
Mass. Office of Business Development
Mass. Business Development Center
Mass. Small Business Development Center
Mass. Export Center
Mass. Office of International Trade & Investment
MassVentures
Mass. Growth Capital Corporation
Mass. Technology Collaborative
Mass. Technology Transfer Center
Mass. Clean Energy Center
Mass. Life Sciences Center
Commonwealth Marketing Office
Don't worry about any waste or duplication - the Mass. Office of Performance Management & Oversight was created with the job of making sure all these groups are working together.
Each of these places has dozens if not hundreds of employees with titles I can't even parody:
Executive Assistant to the Deputy Director
Program Assistant to the Director
Director of Cluster Development
http://www.masstech.org/meet-masstech/our-team/meet-our-staf...
All of these people standing by ready to fire back an email that they really can't be of any help
They laid off people who were doing actual work to make room for people whose only job responsibility is to collect a paycheck.
It amazes me no end!
The wisdom of even that approach is debatable, but the actual language of the law is far from conveying that intent and is a total, indecipherable mess. No one has the remotest clue what is actually covered under the language of the law.
I'm part of a small software consultancy in MA, and we've now got 30 days to decide which of our customers this crazy language applies to, and which it doesn't. Is Django "pre-written" software? Does spinning up and customizing an instance count?
It's crazy town.
Such is what happens you impose high tax rates: people relabel transactions so they fall outside the tax. The. You have to issue new rules that try to make the relabeling not work. Then, the regulation books start to explode in length to cover the all the blooming techniques, and with it, he regulatory agencies...
And then the process starts over.
It's funny that this takes place at the site of the first tax rebellion.
The problem here is somebody wrote a "services tax" without the first clue what they were actually doing. It's like intending to impose a new cigarette tax, but writing it such that anything which burns might fall under the definition of cigarette.
Also, the main point is that they're not following the spirit of the law. The primary value is the software, but they're under-charging for it and over-charging for related services in order to avoid taxation on the true value of the software. That's what someone was ham-fistedly trying to fix.
And this is one of the main problems. Not only are governments (local, state, federal) trying to find creative ways to siphon money from the private sector, but the inherent nature of software services make this impossible to manage or track.
What's wrong with allowing a company to charge $1 for their software, then $100k for customization? Yes, it's a sales tax loophole, but how would this be different from a custom electronics or plumbing supply company from charging $1 for the parts and $100k for labor?
I don't know that a gross receipts tax is the answer, or what is. MA is free to do what they want, I'm just worried that this will spill over to IL, who is much more in debt.
Don't look for me to defend sales taxes in general, they're regressive evils and should be ripped out and replaced with progressive income taxes. But so long as they exist, I'm happy to see loopholes like this closed. Just not closed stupidly.
I would argue that an income tax is a moral "evil", but realize we're way past ever abolishing it. There's no inherent reason a governing power should ever know how much income you produce, even though it may be convenient (and popular) to impose. I suppose that's where our worldviews differ.
A regressive tax has a specific definition. It's a tax whose effect is to take a greater percentage of income the poorer you are. Sales taxes, like all flat taxes, are inherently regressive. If I make $10,000/year, all of it is getting spent, which means that less any exemptions (which vary by state, but may include things like staple foods), an 8% sales tax eats 8% of my income.
If I make $100,000 year, I may well only spend half of that, which means only 4% of my income is taken.
This is evil in general because I believe, as you clearly do not, that "governing bodies" are simply instruments of civilized society, and those making the most money are reaping the greatest rewards from that society, and should be required to contribute back a correspondingly greater amount.
But it is especially evil because if I'm making $10,000, I'm just trying to survive, and the sales tax makes that harder, while if I'm making $100,000, I'm way past survival, and well into luxury territory.
The ABI Hub is an awesome coworking space and startup incubator in Manchester, NH. http://abihub.org/
I've been going there for a few months and moved to NH at the beginning of the year. It has been awesome.
There is a technology scene ready to bloom in Manchester. Also, the cost of living is about 50% of Boston's.
For those who aren't from around here, NH doesn't have unfair taxes :)
And the crux of the matter - as NH does absolutely nothing against federal taxes, you'll still be paying the majority of your present transaction costs.
One town I was in won't pick up your garbage unless your recycling bin is out as well. No concept that someone could produce so little trash and would rather the quarter-full recycling sit the rare occasion they put out a trash bag. And of course it precludes taking the emptied bin in before the second truck comes around. And FSM help you if the guy decides to search in your bag and declares your trash demolition or construction material.
They of course had color coded water restrictions posted everywhere busybodies frequented - elementary schools etc. And I can't not mention the legislature-dictated seat belt law.
But my quarrel is that the nanny state is a symptom of how broken and autonomous our "representational" system is. One shouldn't have to give up civilization to get away from the busybodies, and escaping to NH is just a pressure relief valve. While the people doing it feel freer, this couldn't be further from reality - the ridiculousness has only become distant because other people are more distant. All types of militarized law enforcement may still freely kill them or their dogs while pretending to be heroes. Their communications are still stored indefinitely and mined for thoughtcrime. They're still prohibited from ingesting whatever chemicals they'd like. And they're still working over a quarter of the year to support these hostilities against them. But since they have an illusion of freedom they're likely to stop criticizing the entirety of the nanny state, focus on aspects they identify with, and flip to supporting it.
Sure, not everywhere in NH is like that. But one can't spread libertarianism by proposing to dismantle the fire department.
(What do you expect from a town incorporated in 1751 with 110K residents?)
The landlord removes my snow on time for free...
Never had an issue with the electricity.
But for a homeowner, yeah. I agree. Plus higher property tax.
As a result, NH has blessed us with drive up liquor stores right on the interstate. ;)
Particularly unwise given how easy it was for people to move to Northern Virginia.
Is there a paralogous example from a different profession that we can use to gain insight into this new law?
Here in Ontario it's much simpler (but steeper) - the harmonized provincial/federal sales and service tax is 13% on everything. Sales, service, you don't have to give a crap. There's a short list of exemptions for groceries and medical stuff.
Our taxes are high, but straightforward.
Every store in MA has their own opinion about what foods are taxed and what aren't. Candy-yes, gum-no, ice cream at a grocery store - no. Ice cream in a cone - yes.
In some states groceries are exempt from sales tax, but restaurant food is not exempted by any state (except in the trivial sense in states that don't have a sales tax at all).
Federal tax is 5% and provincial tax ranges from 0 to 10%, meaning you pay 5-15% depending on your location for each good or service rendered. Essential goods/services (defined by each province and the federal gov.) are not subject to the specific tax (e.g. in Quebec, books are considered essential goods by the province, but not by the federal, so you pay only 5% tax)
There is something called "exempt capital improvements" and they do not get taxed. Basically, new kitchen remodel doesn't get taxed, but fixing a broken faucet does. Repair a cracked bathtub? Taxed. Rip it out and remodel the bathroom? No tax.
The real salt in the wound for businesses was that the tax was going to be retroactively applied to the previous four years of revenue. This would have driven a fair share of our fledgling technology sector out of business almost immediately.
Thankfully, our Governor did not agree with the way the tax was passed into law, nor how it was applied. He first delayed and eventually removed the tax all together.
When politicians sneak revenue draining taxes into the business market like this, without public comment or discussion, it makes me truly concerned that they are simply self interested.
Hopefully the Massachusetts state house will pull their heads out of the sand and clear up the confusion with their constituents. Maybe by next election cycle, those affected will let their feelings be known in the polls.
It occurred to me I've been a developer for 13 years and have no clue who's got my back if the government starts to target my business unfairly. What kind of industry lobbies or trade groups are even out there to fight a law like this?
Per question 23, it appears that adding a computer to a LAN is an example of a taxable service.
So with that in mind, the implementation problems include:
1) There was very little notice given to the affected parties - the bill passed July 24, effective July 31. (This is somewhat unavoidable, since part of the stated purpose of the tax is to fund transportation projects in 2013 - so delaying its effects would be counterproductive to the underlying goal).
2) There's still quite a bit of ambiguity surrounding implementation, including - crucially - what's taxable and what isn't. MA DOR (the state's version of the IRS) has issued some FAQs [2] and clarifications - which, annoyance aside, have actually been helpful. However, they only begin to answer the very real questions that this presents for many businesses - but we're responsible for collecting the tax basically yesterday (first filing due September 20, to cover taxes starting August 1). I read today that DOR will issue additional clarification and guidance in October... which I can only assume will be retroactive. So we'll likely be forced to either charge some people an unnecessary tax, or take an unexpected 6% revenue cut, or possibly end up having to pay penalties. Merits of the tax aside, the uncertainty - inevitable with such a new rule! - is what's killer.
3) Broadly speaking, the distinction they're trying to draw in the law does seem a bit weird. As I understand it (and IANAL, but have talked to a few - all of whom are still trying to parse what this means), if I write a custom CMS "from scratch", that's still considered a tax-free service. If I train you on, say, Wordpress (or any open-source or commercial product, really), that's still tax-free as well. If, however, I build a plugin to integrate Wordpress with your in-house SSO system - that's taxable. A custom theme? Probably.
Where do frameworks fit in? (Say, if I write you a shiny, custom CMS in Django). I don't know. There's a specific clarification issued by DOR that operating systems are exempt - or rather, to quote directly: "Custom application software (including custom software that incorporates such proprietary code) that is designed to run on a prewritten operating system is treated as custom software and not as a modification of the prewritten operating system software."
There are some interesting caveats being carved out - for example: "Suppose a computer system is designed but not actually built, so software is never actually integrated with hardware. Are the services still subject to sales tax? No."
Again, while on the whole I'd of course prefer that this tax go away entirely, at the end of the day it's no more or less rational than the taxation (or non-taxation) of many other goods and services. The critical problem here is the implementation, which introduces a whole lot of uncertainty and risk into a business that, until a few days ago, has never had to deal with this sort of thing.
[1] http://www.mass.gov/dor/businesses/help-and-resources/legal-...
[2] http://www.mass.gov/dor/docs/dor/law-changes/faqss-computer-...
Couldn't you argue that Wordpress is a framework for which you are building custom software?
Here in Australia we have 10% GST (Goods and services tax). So wherever you're from in the country you can expect both goods and services to be priced the same. So much simpler for the average consumer!
So it was formed that way - each of the original 13 states got together to form a more perfect union. But each of the 13 states retained some autonomy including ability to levy tax within the state for various means or purposes.
Been that way ever since.
Can't see a national tax - our culture would not allow it.
Completely different.
Federal Income tax, Gasoline tax, etc all fund the Federal Government. And yes the Feds does distribute some of the money via grants or a Congressional action (Medicaid, highway funds, etc).
But I don't see the US adopting a national use tax like VAT that is collected by the Federal government but automatically given out to the states based on where the money is spent.
Our country likes to keep things on the state and local level as much as possible.
So that when you get fed up with sky-high taxes for no services from places like Massachusetts or California, you can move to Texas or Florida. http://en.wikipedia.org/wiki/Laboratories_of_democracy
Examples of data processing include check preparation; accounts payable or receivable preparation; web hosting, web site creation and maintenance; data storage, including offsite backup of electronic files; conversion of data from one type of medium to another (i.e. converting paper documents or videotapes to digital files); and the performance of a totalisator service with the use of computational equipment required by the Texas Racing Act. Data processing services providers include sellers of software as a service and application service providers.
[1] http://www.window.state.tx.us/taxinfo/taxpubs/tx96_259.pdf
Many states have long had laws that taxed "pre-written or canned software." MA is just one of the newer states that have enacted this law. New York has had the law in the books for years.
Pre-written software means that you've previously created software and you've literally re-used the code.
Professional, custom or designed software is still exempt as a "professional service."
What happens when you're like SAP and you start with canned software, but then customize it? Then, you pay sales tax on the canned portion and then you don't pay tax on the customization costs.
In sales tax audits, they test this by comparing code sold off the shelf to the code presented as "custom." Generally, consultants are used.
There are also sales tax on "informational reports." This started as paying sales tax for "stock tips" sent over the fax. But, today this has extended to informational reports that were created by software. Thus, a lot of businesses that "don't sell canned software" and provide a "service" cannot escape the tax law by simply providing the end product alone.
I can understand people getting angry, but the law has been around for a while... I've gone through multiple audits with companies such as reuters, bloomberg and etc. I don't particularly feel that its unfair, since if you provide a "custom service" then you're exempt.
Obviously, there are always going to be ways to "technically" get away with avoiding sales tax, but that doesn't mean that they're inherently unfair. Companies avoided paying sales tax on software for a while, until the states realized that they were being cheated by these businesses. Then, businesses decided that if we don't sell the software on "CDs" then its not tangible property and "legally not taxable." So, they would bring the CDs and install the software and then leave with the CD's to effectively avoid the sales tax.
Then, they started to allow the software to be hosted online and only provide the "end-product aka SaaS." Services are commonly exempt and hard to follow, thus they escaped the states radar for years. Its a cat and mouse game that will continue.
I think the best example is if an attorney or accountant were to provide the same exact tax return or memo to everyone, then it'd be taxable under sales tax law. But, because we provide a different memo or tax return to everyone (maybe using a system like turbotax or something), it is a custom product because the service is only applicable to that person. If the developer provides a copy of turbo tax, then its taxable because its always the same. But, if the developer uses RoR, Python or some other system to "create" the end product for the individual, then its not taxable. Hopefully, this crude example is decent enough to get the point across.