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Massachusetts: New tax on computer and software services sparks battle, confusion

Industry leaders are seeking to override H.B. 3535, the Transportation Finance Bill, which made various computer and software services subject to sales tax. Additionally, guidance provided by the Massachusetts Department of Revenue (the “Department”) and the volume of industry discussion on compliance with the law, indicate confusion and the complexity of complying with the law for many technology companies. McDonald Hopkins covered H.B. 3535 in a previous Multistate Tax Update.

To date, various actions have been initiated in opposition to H.B. 3535, indicating general distaste for the new sales tax. First, business leaders have filed an initiative petition to the Massachusetts Attorney General to repeal the law. If the Attorney General determines that the petition is constitutional, the petitioners have until early December to collect approximately 69,000 certified voter signatures. If the requisite signatures are collected, the Legislature will then review the petition and decide whether to repeal, modify or take no action. If no action is taken, an additional 11,485 signatures must be collected and then the voters may decide to repeal the tax when they vote in November 2014. Secondly, Massachusetts Senator Karen Spilka filed a petition, S.D. 1872, to repeal the sales tax. This is significant because she previously voted in favor of the law.

Technology businesses have been outspoken regarding their disdain for the law, stating that compliance with this law has been exceptionally difficult because the line between taxable services and those services not subject to sales tax is a hazy one. Businesses have been upset with the short time-frame (one week) legislators provided between the time the law passed and the time to begin compliance.

To help alleviate taxpayers’ concerns with compliance with the law, the Department issued a FAQ page and continues to update it with additional questions. As of the date of this article, the Department’s FAQ page has ballooned to 9 pages and 55 questions. This is yet another indicator of the difficulty taxpayers have had in their efforts to comply with the law, as well as the general confusion caused by the imprecise language utilized in the law.

The Massachusetts Taxpayers Foundation, a nonprofit nonpartisan tax think tank, estimates this tax could create $500 million in new tax revenue. It has been reported that others in the IT industry claim that number could actually reach $1 billion. Legislators originally intended for this change in law to add $161 million in revenue. Industry representatives claim that legislators did not tailor the law appropriately nor fully appreciated how far-reaching such a bill would be. At a minimum, industry representatives would have appreciated a seat at the table.

Adding fuel to the outrage, on the same day the sales tax on these various computer services became effective (July 31), the Massachusetts Legislature passed S.B. 175 that authorized a sales tax holiday for August 10 and 11, 2013 for non-business sales costing $2,500 or less (with some exclusions). This new tax on computer and software services does not fall under the tax holiday.

Democrats have overwhelming majorities in both legislative houses, making bipartisan support essential to repealing this law in the near term. In any event, it appears that Massachusetts taxpayers will have to live with the law for at least some time absent heightened legislative efforts.

Washington: Alternative energy tax credit  on forest-derived biomass fuel remains available

Through June 30, 2015, Washington law provides a business and occupation tax credit for harvesters of forest derived biomass sold, transferred, or used for electricity, steam, heat or biofuel. The law provides a credit per harvested green ton as follows:

  • For forest derived biomass harvested October 1, 2009 through June 30, 2010, zero dollars
  • For forest derived biomass harvested July 1, 2010 through June 30, 2013, three dollars
  • For forest derived biomass harvested July 1, 2013 through June 30, 2015, five dollars

This forest derived biomass typically consists of sawdust, bark and wood shavings from saw mills and pulp mills – waste from the logging and paper industries. Scalable timber and firewood is excluded from this program. These qualifying materials are then typically burned to boil water, funneling the resulting high-pressure steam into a turbine to generate electricity.

Proponents claim this process is carbon neutral, as these are simply waste materials that would be left to decay and create the same amount of carbon dioxide as would be created if the material were burned. This energy also helps companies meet alternative energy quotas. Opponents claim that at least for now, burning such biomass pollutes more than coal and pollutes far more than natural gas, an energy source that is abundant in the U.S. In the long term, opponents recognize that processes to extract energy from this forest biomass will improve. How much it can improve has yet to be seen.

This program is not without its caveats. For one, the amount of credit allowed for a reporting period may not exceed the tax due for that reporting period. Any unused credit may be carried forward to future reporting periods for a maximum of two years. Only “harvesters” qualify for this credit. A “harvester” is a person who, from the person’s own land or from the land of another under a right or license granted by lease or contract, either directly or by contracting with others for the necessary labor or mechanical services, fells, cuts, or takes timber for sale or for commercial or industrial use. Note that contractors are generally excluded from the definition of “harvester”.

Washington issued a special notice to taxpayers on this tax credit on August 20, 2013.

Click here to read the text of RCW § 82.04.4494.

Ohio: Guidance issued on advertising and direct mail sourcing rules for sales tax purposes

The Ohio Department of Taxation recently published an Information Release (ST 2013-01) providing guidance defining “advertising and promotional direct mail” and “other direct mail” and explaining the sourcing rules for such types of direct mail. This is significant because this guidance provides the method in which sales taxes are to be calculated.

Definitions

The Information Release defines “advertising and promotional direct mail” as printed direct mail, the primary purpose of which is to attract public attention to, or attempt to sell, popularize or secure financial support for, a product, person, business or organization. For purposes of this definition, “product” includes tangible personal property, a product transferred electronically or a service.

According to the Information Release, “other direct mail” is any direct mail that is not “advertising and promotional direct mail” regardless of whether the same mailing includes “advertising and promotional direct mail.” Examples of “other direct mail” include, but are not limited to:

  • Transactional direct mail, such as invoices, bills, statements of account and payroll advices;
  • Legally required mailings, such as privacy notices, tax reports and stockholder reports; and
  • Other non-promotional direct mail, such as newsletters and informational pieces delivered to existing or former shareholders, customers, employees or agents.

Sourcing rules

The Information Release provides that, in general, sales of “other direct mail” are sourced “to the location indicated by a purchaser address that is available from the vendor’s business records that are maintained in the ordinary course of the vendor’s business.” In contrast, generally sales of “advertising and promotional direct mail” are sourced to the address from which the tangible personal property was shipped.

However, the Information Release explains that if the purchaser of “other direct mail” or “advertising and promotional direct mail” provides the vendor with a direct pay permit or a certificate of exemption certificate claiming “direct mail” (or other written statement providing a reason for an exemption and containing other required information), then the vendor, in the absence of bad faith, is relived of all obligations to collect and remit any tax on such transactions and the purchaser is required to report and pay the applicable tax due to the jurisdictions in which the recipients of the “other direct mail” or “advertising and promotional mail” are located.

In addition, the Information Release states that if the purchaser provides the vendor with information showing the jurisdictions to which “advertising and promotional direct mail” is to be delivered to the recipients, then the vendor shall source the sale to those jurisdictions, collect and remit the applicable tax, and, in the absence of bad faith, shall be relieved of any further obligation to collect any additional tax on such sales. However, the purchaser must report and pay the applicable use tax due to the jurisdictions in which the recipients of the “advertising and promotional direct mail” are located if the vendor has not collected the applicable sales tax in those jurisdictions.

Click here to read the full Information Release.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Jeremy J. Schirra
216.348.5444
jschirra@mcdonaldhopkins.com

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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