What does the new computing tax cover?

( – promoted by Paul R. Ferro)

So the legislature decided that a rich source of new revenue would be to tax computer services, as only three other states currently do. The original language was so vague that it both didn’t get anyone’s attention (people thought, “that won’t apply to me”) and also was incredibly scary for the small number of us who are both in the field and knew that they absolutely would go after every possible service if they could.

Thanks to the revolution in rentable computational services (cloud computing) everyone from small startups to huge banks and hospitals consume an incredible amount of services. Millions of dollars in cloud computing services are consumed every day in Boston alone. Many startups simply could not exist without consuming them. All-star local tech outfits like Hubspot (Cambridge), Acquia (Burlington), Stackdriver (Boston), and Assembla (Needham) both consume these services in huge quantities, and also sell their products as a service.

However, it looks like, at some point, the people who wrote the tax law got the message that they couldn’t include basic cloud computing, and created an exemption. (Thank God, or this would have hit every large and small business like a Tsunami.)

Don’t get me wrong – this is still a big deal.

I will show the language and 10 possible tax scenarios.

(read more…)

Here is the language for the tax: (official document here.)

“‘Services’, a commodity consisting of activities engaged in by a person for another person for a consideration; provided, however, that the term “services” shall not include activities performed by a person who is not in a regular trade or business offering his services to the public, and shall not include services rendered to a member of an affiliated group, as defined by section 1504 of the Internal Revenue Code, by another member of the same affiliated group that does not sell to the public the type of service provided to its affiliate, or data access, data processing or information management services; and provided, further, that the term services shall be limited to the following items: telecommunications services, computer system design services and the modification, integration, enhancement, installation or configuration of standardized software. Nothing herein shall exempt from tax sales of tangible personal property subject to tax under this chapter.”  (Amended language in italics.)

Rather than try to explain it, let me give some situations and predictions. (I circulated the language among techies I know and these are what we came up with.)

1. Acquia Rents Thousands of Servers from Amazon to run Drupal sites for its customers

Uncertain. They clearly meant to not tax cloud computing, but I am not certain that renting servers is exempt, as the language isn’t clear on this case. This is a big deal as one of the most important parts of cloud computing is server rental. We need clarity on this.



2. Hubspot’s Core InBound Marketing Product

Yes. Hubspot’s customers will have to pay sales tax. It’s possible that “information management” can be defined so broadly that their tool is exempted, but if they wanted it to be that broad, there would have been more in there. I will ask the Hubspot guys.

3. Fidelity Buys Next Generation 401k Management Tool Development Contract from A Services Firm

Yes. If my company sells Fidelity the next generation of a tool, they will have to pay. The language says that Fidelity doesn’t have to pay for the part of the work where we sit around and figure out the architecture, just on most of the work that is the actual software. Still, this is an enormous tax on a huge amount of business in this state.

4. Freelancer Sells New Drupal Site to Non-Profit



Yes. If my wife creates a Drupal site for a client, she will have to charge them the tax. Hitting small providers is awful.

5. Political Candidate Rents $19/month NationBuilder Site for Campaign

Yes.

6. Dana Farber Uses Amazon’s Big Data Analysis Service (EMR instances) to Process Clinical Trial Data

No. This is clearly what they were trying to exempt.

7. John Hancock Buys Assembla to Manage It’s Software Development

Yes. Assembla’s core product is clearly customizable software .

8. Dynamic Solutions Sells Data Analysis Services to the MassGOP on GOTV Strategies

No. Dynamic Solutions isn’t delivering either software or a website to do the analysis, just a powerpoint deck about their conclusions. They will probably have to pay the tax themselves for some of the things they do to create that analysis.

9. MassGOP buys Google Apps for all party business activities

Yes.



10. Stackdriver Sells an iPhone App as an Add-on for Its Customers

Uncertain. Are mobile apps “installing standardized software”? I don’t know. Does it matter that you’re technically buying from Apple and not Stackdriver? Not sure.

Conclusion

Even without cloud computing, this is a very big deal and will negatively impact lots of firms, from freelancers to big banks. We need clarification on the cloud. In addition to data and information management, they need to exempt renting computing power explicitly.  Also, we need to know if “apps” are also exempted.

Note: The tax begins July 31, so consider the next couple of days a tax-free holiday.  Also note that when the state does a general sales tax holiday, such as the one they often have in August, this will also apply to services. This is interesting, because the sales tax holiday is sort of meant for washing machines, not multi-million dollar software contracts. We will have to watch what the DOR does when firms like mine decide that all services contracts will be signed once a year in the middle of August. Heh heh heh – they haven’t thought of that and please no one tell them.

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