Urgent: Tax Issue Facing Florida MSPs

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. 

2) Legislative Affairs Committee: We have formed a Legislative Affairs Committee. The committee is comprised of attorneys, CPAs and MSPs; all have existing relationships with key lawmakers and auditors. 

3) Reaching out to Vendors: We have heard from many vendors offering their help in the matter. Most notably Arnie Bellinni of ConnectWise; he and Charles Weaver feverishly exchanged a flurry of emails over the weekend and will be speaking today. 

Look for more information TODAY on the email hotline, name and contact information of the CPA firm and members of the Legislative affairs committee.  

We are really working as hard for you as we can; please bear with us :-)

Celia Weaver, Co-Founder- MSPAlliance 

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."

First of all, when crafting new pricing models, we should run them by a CPA to determine the tax consequences.  Each state has it's own way of handling taxes and when you are selling on the Internet or across state lines, you must consider taxes as it get's more complicated.

Please consult your CPA!  Find one that understands the service industry and consults with businesses - not just focuses on tax season or audits.

Below are some things you will want to discuss with your CPA so that they understand the unusual scenarios that your business encounters.  I have condensed them in to "rule of thumb" advice we have received over the years...

• When selling product to a customer where ownership of the product changes hands then sales tax should be paid.
• Tax should be paid in the State where the sale occurred.  This is not always the State where the customer is, it many times depends on where the product is shipped when it is purchased from the vendor.
• Consider whether you are being asked to double dip.  Are you paying sales tax and then also charging sales tax again to the customer, collecting it and paying the state so that the tax is paid twice?
• When "bundling" hardware and service together, does ownership of the device change hands or is it a rental?
• Historically, service has not been taxed.  Professional consulting companies that charge by the hour (CPA, Attorney, Engineers) do not pay sales tax on service hours.  How similar is your business to this model?  If you convert your time to a monthly "retainer" that includes a certain minimum number of hours of consulting, then charge by the hour for additional time spent, then you are very similar and should not be required to pay tax on your time.  After all, you are paying payroll tax and FICA and City tax and State tax on your employees, right?

Again, please consult with your CPA.  If you do not have one then get one.Hardware as a service and software as a service are not new ideas.  The ASP model has been around for many years.  You are essentially "renting" your purchased hardware and software (that you have paid sales tax on) to others.  It is not a pricing game to get around sales tax - it is a way for small businesses to benefit from the expertise that your firm offers in a right sized and utilitarian manner. The hosted datacenter space, software and hardware depreciates and must be replaced over time.  MSP's have real costs to providing not only the expertise (payroll tax) but also the equipment and software (sales tax) that is collected by the government.  Taxes must be paid and they must be paid in a consistent manner, but to ask that they be paid in multiples is oppressive.  If you are being asked to do this, consult your CPA and Attorney.             Michael Backers, P.E.              President, Ordovician Group 

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!  But after almost a year of living with the imminent fear of closing our doors because of 3+ years of sales tax due to the State, we prevailed.

New company, 10 years later.  The exact same audit. The exact same issues. So you have to ask, "Has the issue of what is specifically taxable in our industry not been resolved by now?  Can they not just give us a definition of what is taxable and when?" Its not like we are charging tax and putting it in our pockets.  If its taxable, we will collect tax. If its not, we don't want to burn our clients.  Their questions are a lot of nonsense.  I can urge you to not get involved in those nuances with the auditors.  They already know the answers. 

We were nice this time around for the first 1.5 years of the argument.  You heard it right...1.5 years of submittals, resubmittals, appeals, etc. We ended up with a hard-core lawyer driving to Tallahassee to talk to the supervisors. After that encounter, the State decided that we were right...never mind the whole thing!

15 years or so ago, the Florida advertising industry recognized the same shakedown from the State.  They got together and formed a lobby group.  They managed to get the legislature to mandate that the Department of Revenue write specific rules about what is taxable and what it not taxable in their industry. There has not been a shakedown issue in their industry since then.

For now, I would advise anyone to not deal with the auditors directly.  Being nice and cooperative is not going to help you. Hire a good, hard-nosed attorney as soon as they walk in the door. You'll save money and time in the long run.

The best thing MSP Alliance could do for us is to help us form a lobby group to do what the advertising industry did. 

Celia,The DOR has attempted to collect sales tax on all of our services in an audit last year.  They tried this to one of my other competitors in the panhandle too.  We finally convinced them that we are not "servicing tangible personal property" (which is subject to taxation).  But they are hitting us pretty hard.

MSPAlliance Member 

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. 

**This is not legal advice.**

 We had a customer call us who was going through a state audit. They called us to tell me we needed to start charging them tax for our monthly maintenance plan. 

It seems the auditor thinks the word 'maintenance' includes replacing parts for free, like on an air-conditioner contract or like DELLs hardware warranty.

I removed the word 'maintenance' from our invoice and called it either 'pre-paid technical support' or 'monthly helpdesk service' or anything other than 'Gold Maintenance Plan- 50 workstations'.

However, as i understand it, if your monthly invoice does cover service AND parts, then the WHOLE invoice would be taxed. In that case, you may want to send separate invoices on separate days.

 Hope this helps.

**This is not legal advice.**

James San Filippo, MBA, BSIT, MCP
Business Sales/Service
Data Cube Systems

james@datacubesystems.com
www.datacubesystems.com

Microsoft Gold Certified Partner

*Please note* We will be continually posting updates here as we get them, so check back often.

What we've heard so far is that an auditor from the FL State Department of Revenue has allegedly told an MSPAlliance Member going through an audit, that sales tax is owed on managed services contracts and not just on the service warranties associated with hardware sales.  

We're gathering information and speaking to other MSPs in FL and will be continually posting updates here. Please feel free to post your comments or questions and/or share any information you may have regarding this issue here so that we can all share in the knowledge.