Urgent: Tax Issue Facing Florida MSPs
UPDATE! We are hearing from MSPs all across the Country that are facing the same tax issue. Please read Celia’s blog updating you on the steps we’ve taken to help MSPs with this issue: http://www.mspalliance.com/blogs/urgent-tax-issue-facing-florida-msps#comment-396
Charles Weaver - Jan 21st, 2010 - Articles
*Please note* We will be continually posting updates here as we get them, so check back often.
What we’ve heard so far
From an anonymous member: "We went through one in 2008 and our understanding is that if we are doing service only there is no tax. As soon as any part is invoiced, then the entire amount becomes taxable. So we make sure that we bill a separate invoice whenever any parts are involved. We do not include any parts on any of our agreements."
**This is not legal advice.**
This is an advisement from the state of FL.
More members weighing in- some say that hardware as a service may trigger a sales tax on managed services in some states. Charles is speaking to someone as I’m typing this to get more clarification on how MSPs can formulate their contracts to avoid this- more details to come.
So me of what is on here is correct. In Florida, whether or not PARTS are involved is the key trigger. Someone said, “If your monthly invoice DOES COVER service AND parts, then the WHOLE invoice would be taxed.” That is correct. You could also have two invoices, ONE for a support ONLY contract and ONE for Hardware Warranty which needs to include the labor to support that hardware warranty. If the State of Florida figured out that you are installing the replacement parts using the support only contract – the WHOLE thing becomes taxable.
The person who said, “we make sure that we bill a separate invoice whenever any parts are involved”…this will NOT work. In a State of Florida Sales and Use Tax audit, they will figure this out. The Florida Department of Revenue will tell you that if I sell you “stuff” and within 30 days, I go back to install that stuff…my labor is taxable. If you sell lots of stuff and labor to the same client, you’d better be able to prove that the labor is in no way associated to the sale of stuff. Otherwise, the WHOLE thing is taxable.
They always explain it with a very simpel example: If I wax your car using YOUR wax, I have provided no product, so I do not charge you tax. If I wax your car using MY wax, the whole thing becomes taxable because (technically) you are getting a product in conjunction with the service.
In MSP you need to be selling an MSP contract that is support only. You can then sell a separate Parts & Labor Warranty contract, if you’d like. It’s taxable because you might have to provide parts as part of it.
The big question is going to be around HaaS and/or other hosted or “cloud based” services. Those are just services. The customer never gets any product. However, Florida’s Tax is a Sales & Use Tax. When you rent a car, obviously you don’t end up with a product, you are just using it. There’s tax on that. The question is, for example, Hosted Exchange…is that taxable?
I also do Business in Connecticut, it’s taxable there. Connecticut specifically states that all Internet based services, where the benefit of the service is being experienced by a user in Connecticut needs to be taxed (and sent to them). They don’t care if there’s a product involved or not. So what about anti-spam? I have servers (in Florida) that take email, weed out the spam, and then deliver clean email to my customers in Florida, Georgia, Connecticut and other places. Is that taxable?
I’m not even asking about HaaS, I’m sure that’s taxable (now or in the near future).
Cheers
– Rory
This is not a new issue facing FL MSP’s (the enforcement of it might be however)
When I faced this issue with sales and use tax. I immediately turned it into a client benefit. I now outsource large procurement to Axis Business Solutions and small purchases I refer to Amazon.
In both these scenario’s I have an affiliate relationship whereby the company earns a commission on referred sales. By outsourcing the procurement in this way I maintain a 100% services business and which is not taxable (currently)
Using outsourced procurement also takes away the burden of using non-billable time to produce quotations and estimates.
I sell it as a differentiator to my clients in that by doing the purchasing themselves they save 7% sales tax from my invoices. And of course this reduces my administrative overhead with the state.
I am a one-man-band at the moment and this methodology works quite well for me.
All the best
Dominic
Celia,
The DOR has attempted to collect sales tax on all of our services in an audit last year.
I went through this 10 years ago at my old company. We went through all of the exact same dissections and nuances of language. It seemed like they had never heard of anybody doing business like us!
Great insights…thanks for sharing with the rest of the membership. We are already forming such a committee that can address these issues. We will keep you posted!
They will come in and put together the two invoices during an audit and then extrapolate it to ALL of your invoices for the audit period.
First of all, when crafting new pricing models, we should run them by
That was very good and sound advice Mr. Backers.
We received this from a member:
"Please advise of the US Standard Industry Codes (SIC) for this relative Managed Service Industry.
Currently in Florida SIC codes 7381, 7382, are taxable. Please refer to Florida Dept of Rev, GT-800018 7/09, Sales & Use Tax on Detective, Burglar Protection & Other Protection Services.
The 1987 SIC Industries list shows SERVICES codes for related computer services as: 7371, 7372, 7373, 7374, 7375, 7376, 7377, 7378, 7379."
MSPs from across the Country are now reporting the same problem as MSPs in Florida. What the MSPAlliance has identified is a need for mass education; both for MSPs and tax auditors across the Nation. The MSPAlliance has taken swift action and has done the following:
1) Help from CPAs: We have retained the services of one of the largest international CPA firms in the Nation to offer our members free consultation. Later today we will set up an email hotline so that members may contact the firm confidentially.
Just got this in from a member in Washington.
Have any new MSPs had to face a Sales Tax Audit in Florida recently, where the state is trying to say their Managed Service Agreements should be taxed as Service Warranties? If so, please reply with your outcomes.
Thanks!
Bill