A host of problems have been created from a state and local tax perspective over the last few decades relating to sales tax on technology. Aside from the Amazon issue most are aware of, there has been a multi-state tax debate as to whether certain software charges are subject to sales tax. Under the traditional sales tax view, sales of tangible personal property are subject to sales tax. However, how is software, which may or may not be delivered in tangible form, taxed? Is it tangible personal property or tax exempt intangible information? Many states have adopted laws to capture software in the taxable base while other states depend on certain aspects of the software. Recently, Minnesota and Massachusetts have tackled different aspects of sales tax on technology.
On September 24, 2013, SAP Retail Inc. v. Comm’n of Revenue was decided. In the case, the software company not only provided taxable software products but also provided implementation services. The court was asked to address whether the consulting and implementation services were separate from the sale of the software itself, or if the services were so closely connected to the software sale that they were also taxable. Despite creative arguments on the side of the state, the court determined that the services were not fabrication services because the company did not furnish the items used to create the software. Moreover, the court determined that the consulting services were an independent and unrelated transaction because one could buy the software without the service of visa versa. Therefore, at least for the moment, consulting and implementation software services do not appear to be taxable in Minnesota.
It was also reported this week that Massachusetts voted to veto a technology tax on computer and software services. Specifically, the House voted 156-1 to repeal the tax, which estimated revenue generation of about $161 million. Massachusetts apparently did not want to send a message and discourage innovators from setting up shop in Massachusetts.
It is refreshing to hear states are backing down to more reasonable positions with the evolution of tax on technology. Perhaps it is a signal of a finally improving economy. It is also a reminder to taxpayers to push their politicians if they are unhappy with a particular tax. Alternatively, this serves as a reminder that the state revenue agency is not always right and if you do not believe something is taxable, then it is your duty to challenge it.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA , based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390. Please also visit his blog , Facebook, and Twitter.