Talk to your lawyer if you doubt me on this one, but Quill vs. North Dakota means that it is the well-settled law [+] of the United States that you cannot be liable for sales or use taxes enacted by a state which you don't have a "nexus" in. What exactly constitutes a "nexus" can be hazy, but the punchline for the overwhelming majority of HNers is that if you do not have an employee who performs work for you within Massachusetts you almost certainly do not have a nexus there.
Theoretically HN users who are also Massachusetts residents will have to start remitting use tax to the state to cover purchases of covered which they made from out-of-state merchants. It is an open secret that compliance in the US with use taxes is nearly zero.
+ Well, until they pass that threatened Internet tax legislation.
If you're a consultant who does work on-site for an MA client, that may also establish a nexus. In some cases it can do so even if you don't physically travel to MA, since the services can be deemed to have been rendered in the client's location. But others are deemed to have been rendered in the consultant's remote location. It's a little conceptually (and legally) unclear where remote services "happen", and seems to depend on the state and the service and the precise consulting relationship.
Here's an unrelated example in a notoriously insane tax state (New York). When is a pretzel a baked good, and when is it prepared food? The tax people often can't figure it out either.
http://www.bizjournals.com/albany/print-edition/2013/07/05/a...
Yes, but at least in MA, they pay when they get audited. Small companies may not be complying without audits, but anyone big enough to use invoice processing software is probably complying -- or at least, is actively ignoring prompts from their software to comply -- which controller/accountants/CPAs don't usually like to do.
You should generally file some amount each quarter (even zero), if only to keep the MA DOR off your back.
As a result, states will ratchet up taxes to cover their increasingly untenable budgets, as we've seen in Illinois (which recently almost doubled its state income tax) and Mass.
My guess is that this process will accelerate the internal migratory trends that are already in place. E.g. Nebraska, which banned defined-benefit pensions in the 1960's is sitting pretty with $43 of unfunded liabilities per person. Relevant to tech, the following states have big research universities (and thus a supply of educated workers) and also relatively manageable unfunded liabilities: Pennsylvania, Michigan, Wisconsin, Texas, and North Carolina: http://www.nasra.org/resources/Moodys1101.pdf.
See section Data Processing Services here: http://www.window.state.tx.us/taxinfo/taxpubs/tx96_259.pdf
Examples of data processing include ... 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... . Data processing services providers include sellers of software as a service and application service providers.
That would, for example, mean that a service like Tarsnap or Heroku would be subject to Texas sales tax, if they had a Texas nexus for sales-tax purposes, which isn't the case in Massachusetts even under the new law.
Is there any place where one can read about this/ any place where one can see data? Now that we are in the new normal and have seen cities like Detroit go bankrupt, maybe states are facing the chopping block as well (depending if they can still afford to make payments on their liabilities). It will be interesting to compare other places based on their financials as well.
EDIT: Alternatively http://www.suntimes.com/news/cityhall/21642911-418/city-defi....
Keep in mind that Detroit had loaned money from other states that aren't likely to get it back.
I'm not trying to make a political point, but there are certain states where the knee-jerk reaction is all too often to increase taxes - or to tax unpopular things like cigarettes - rather than take a look at the budget and see if there's a middle ground.
Taxing spending on harmful things is better than to tax work and activities because what you tax will diminish.
This minefield of regulations about what's taxable and what isn't will just make it much more expensive to sell things, as people pay for lawyers/accountants to figure out what "tax" to add to every outgoing invoice. Since this will decrease consumption, it will reduce other tax revenues, as well as making this pot smaller.
Mad. Stark Raving.
I'm also confused because it seems that most of the reasoning is that companies sell the software for cheap and then make the service contract expensive. I've seen this done by companies like Autodesk and National Instruments for sure, so I can see why they'd dislike it. I design custom equipment, and I'd be tempted to do the same (charge at close to cost for equipment and charge as a service for labor). But this seems like an incredibly poorly conceived way to fix the problem that will cause more issues than it will address, and it's surely not limited to software. I could pull the same trick in any kind of contract work.
If the software is cheap, it is expensive to service it.
However the "Sell software cheap and then charge for service" is the OPEN SOURCE MODEL, where the software is given FREELY, and if you need professional help you have to pay, that is certainly not the model Autodesk uses.
The proposal was to replace all provincial sales taxes with the GST, and to apply GST to everything, to keep it super-simple to implement. Well the provinces hated the idea, and the tinkerers just had to have exemptions added for various reasons. The result was that there were two sales taxes in Ontario, each with a complex set of exemptions. The popular example was that buying five donuts was taxable, because that was "dining", but buying six was exempt, because that was "groceries".
Not quite easy but if your business turns over more than £79k then you will have registered for VAT in the UK.
A US state VAT system would, presumably, result in a matrix multiplier (52 by 52 or whatever the number of different rates are) and require companies to track transactions in the various states.
In the EU, if you're British and buying from Germany, you pay German, not British, VAT rates - they should copy that.
Agreed though, that British VAT isn't as simple as it could be (whole categories exempt, etc.)
http://taxfoundation.org/article/state-tax-collections-capit...
Part of that is having both a sales and an income tax. Some states have one or the other.
When we started we were compatriots with many such contractors in the city. They said, confirmed by our accountant, that our services were not PST eligible so we collected and submitted only the federal GST. This we did for 5 years without any incident; like an audit from the province.
In 2004 our business failed and we were in the process of closing up shop when the feds audited our GST history and found that in 2001-2004 our GST submissions were off and we owed about 30k incl interest and files. We made arrangements to pay the bill. Painful but under control.
But, the federal audit triggered a provincial audit and that's when we discovered that the rules for PST regarding software/it services had changed during our run, making the work we did subject to the 8% PST. The rules for that are eerily similar to those described in the OP.
The provincial government determined that the changes to The Act were retroactive and covered all the business we ever did and that with interest and penalties we owed over 700k payable by the end of that week or they would take action. The company was broke so he action we were threatened with was that, as officers of the company, we were personally liable for the amount and that if not paid by the end of the week, our personal bank accounts would be frozen. This was not good.
Further we found out that at that time, these rules were only enforced when a PST audit occurred. So, when we told the many contractor pals in town that this could be a problem for them. a) they didn't believe it, and b) AFIK none of them changed their practice of collecting only the GST.
Anyways, there was a loophole where a customer could assume the liability for the PST by giving us a waiver form. Luckily the majority of our work was with one customer, a huge corp, who agreed to do this and we were off the hook.
It was a very stressful week.
PS. I have not done any consulting since 2004 so I am not aware of any subsequent changes to The Act. AFIK, none of the contractors I know were dinged the way we were. I figure that harmonization of the taxes means they are collecting tax for both govt entities now.
[added] The definition of "taxable service" may or may not have applied in our case. We were without resources to challenge the fact so as far as we were concerned the ruling and payment demand would stand as presented. The mega corp was so large that they had a legal department devoted to minimizing tax and this was just one more thing that department dealt with. A very small thing in relation to the overall dealings of the customer.
Honestly, the gov't folks are playing whack-a-mole here trying to keep up with fast-growing areas that don't fit the old "you sell this widget for $X" model they're used to. And so they're going to write overly broad rules as they don't understand technology and related industries. There is no intrinsic reason that SaaS should be free of tax and so the more worrying aspect of this legislation (NY has similar) is that it is so difficult to understand and open to interpretation and the mental tax it imposes on businesses who live in a cloud of of uncertainty about how they should treat their revenues.
That said, I think the idea that it will drive biz out of the state is naive. California is not a particularly biz friendly state in terms of taxes but the Valley and even LA seem to be doing just fine.
I suspect many other small start-ups will make the same choice we did until this all gets sorted out.
Personally I read that it's kind of like sales tax, and buying online. If the seller doesn't do business in the state you reside it's up to the purchaser to pay the tax.
It's a game of wack a mole, and like all arcade games, they end pretty quickly when you can no longer put any more coins in.
Why not tax something that no one likes that can't move out of state - TV and radio ads?
I provide editorial and publishing consulting - I don't write code to sell, but I do configure and patch other people's code. Am I covered by this law? Well, I guess I am.
Easiest solution for me: don't accept clients in Massachusetts.
Welcome to being a large enough part of the economy to attract political attention.
Love, the energy industry
The US just became a little more EU. Congratulations!
EDIT: I meant 'import tax' where I wrote 'income tax'. Sorry for the confusion.
The people this impacts are those currently consulting for MA clients in a capacity that was not considered software sales previously, but now might be. For example, if you sold an analytics package in boxed software, that was always clearly a "sale" and is unchanged. But if your business is based around, for example, having a free SaaS analytics service, along with an offer that enterprise clients can pay you to get a self-hosted version installed on their own servers, that has typically been treated as consulting in MA, but is being reclassified as selling software. The theory is that you are basically selling software (a copy of the analytics package), not really consulting, and the fact that you didn't put it in a box with a bar code is irrelevant. The complaints are largely based around the vagueness of the definitions and the short notice of implementation.
So if that's accurate, it makes perfect sense. Of course, crafting a law that actually targets this and this only is extremely hard to do, and the short notice here is ridiculous.
But if that's the actual motivation behind the law, it's just a case of where do you draw the line between selling products (taxed) and selling services (not taxed)? Of course there's a gray area between them.
Then the consulting firm would pay the sales tax when they buy the software (before tweaking it).
Sorry, but taxes are not theft in any general way, by any stretch of the imagination.
If you do not pay your tax, violence is threatened and will be brought upon you if you do not comply. This is theft. It does not matter if the thief uses it for altruism. It does not matter if the thief forces roads and other services upon you by outlawing competition.
The fact remains that the initiation or even the threat of violence against an otherwise peaceful person is wrong, and trying to argue otherwise is an indefensible position.
Just try to imagine how a society without a government could function and still have all the things we currently have. Try to come up with solutions. Think about the demand side of the equation. Just for once, try to imagine how to organize things in a world where it's, for some reason, impossible to create a government. You'd be surprised of your own ingenuity.
Likewise, people who gripe about taxation fail to recognize that it's an important, though often annoying process. The number of essential government services that you use everyday, even without leaving your house is surprisingly high.
What's more, this concept that we should leave everyone to fend for themselves and should simply ignore those who are less fortunate borders on sociopathy. I, for one, take comfort in knowing that even if everything in my life falls apart, there are some basic social safety nets in place to keep me from starving to death of the streets.
Actually, it borders on something we call "nature." Whatever position we take about nature, what we can't do is ignore it.
The antipode of nature would be a society in which there really is a social safety net that isn't temporary and discretionary, absolutely reliable, and not means-tested. Such a thing would collide with reality, the collision would be spectacular, and reality would prevail.
> I, for one, take comfort in knowing that even if everything in my life falls apart, there are some basic social safety nets in place to keep me from starving to death of the streets.
But there is no such thing, not in the way you seem to think. If such a net existed as more than a limited approximation, it would be destroyed by overexploitation.
Human societies live in nature, and nature is in charge. Nature doesn't waste anything. The human reproductive capacity is limited only by available resources and premature death.
> The number of essential government services that you use everyday, even without leaving your house is surprisingly high.
Yes -- and the number of ways that government can misuse or waste tax revenues is surprisingly high.
I recommend a skeptical attitude toward government and hypothetically perfect social safety nets.
You're young -- you'll figure it out. “Show me a young Conservative and I'll show you someone with no heart. Show me an old Liberal and I'll show you someone with no brains.” ― Winston Churchill
For example, many people will sneer at this tax yet cheer on other taxes they don't have to pay.
This "test" is hilarious!
If stores could not determine how much merchandise you had in your cart, more people would shoplift. So prices in stores are theft! If you could not determine if someone else drove your car, then your neighbor might sneak a joyride. Your owning a car is theft!
> My guess is that 90% of people who preach about the social contract and helping the poor would keep the money.
And if we replaced the social contract with private contracts, nobody would ever cheat on those, right?
An unenforceable law is a bad law. Good laws are designed to solve problems like free riders or production of public goods in a way compatible with rational self-interest. It is not hypocritical to act in your self-interest while simultaneously supporting the rule of law.
Let's not mistake the fact that people don't like taxes for some sort of deep, abiding flaw in the legal situation.
(Now, the complaint that implementation was too sudden, that's totally valid. They should have had a several-month gap between passing the law and the tax kicking in.)
In this case, though, they are charging sales tax on some services (that's what the law is about). It has to do with services tied to "goods" or pre-written software. So, integrating, customizing, installing, etc.
I believe that this is the area that might get amended or clarified soon (I have written the MA DOR about it, as I know many have). They need to clarify the line between bespoke and pre-written but customized a little better.
Also, I've heard a few time (but don't know if it's true) that this law is modeled on laws in 24 states. If true, then a lot of people on this list are probably supposed to be dealing with this already.
That is why the Federal government's response to the Detroit bankruptcy is so important. Are the rest of us going to be on the hook for the unfunded munis or not?
Sounds like the solution is pretty obvious. And I doubt anyone will miss Boston winters.
If they apply this tax towards STEM education, then the benefit might be worth it.
But yes, it is a net negative....I just don't understand why they would do this. They should be offering incentives to stay there. This is a self-invoked brain drain.
When the other shoe drops, the money is going to come from somewhere or the state will go bankrupt.
Most lawyers spend time working on client's problems, not "argue all day".
Lawyers bill their time often in 5 minute increments, and only charge for time they are actually doing something.
If the average engineer sat down and tracked what they did every 5 minutes of the day, i think you'd find they are a lot less productive than they think.
Proof? This is worthless of a statement as
"[Lawyers] are far less productive than engineers -- all they do is read reddit all day and not create anything of value."
http://repealtheitservicetax.com/2013/08/02/plumbing-and-car...
Is it because that number is perceived as low, and mentioning it undermines the argument of how dire opponents think it is?
(Genuinely asking, not trolling; my employer is almost certainly going to be hit by this tax.)
So no, it applies if your client is located in the state.
I read the law and best I can tell, I don't qualify for this. It seems to be centered around "pre-written" packaged software. I'm writing it right now, so how can it be "pre-written"?
I won't pay this tax until I hear a valid argument that doesn't start with "Well, to be safe...". I'm not paying the state protection money to be safe from vagueness of their laws.
Using a library isn't customizing, according to the FAQ -- as long as the work done to use it is < 10% of the total project. So, if you take 5 months to write an iPhone App, then you need some library, and you download it and add it to your project in 2 days, you are ok. If you were worried, you could line-item it out and charge tax on just that work.
Sounds like a complicated mess.
