Another tax break for adults returning to school / The write-off can help cover your costs

Bill Bischoff for MarketWatch / WSJ writes:Lots of folks are going back to school to improve their standing in today’s still-tough job market, and there are some helpful tax breaks for doing so. In an earlier article (Want a tax break? Go back to school) , I explained when you can claim the American Opportunity tax credit (up to $2,500) or the Lifetime Learning tax credit (up to $2,000) for your education expenses. But what if you don’t qualify for a credit? This could happen because you don’t meet the eligibility rules (a distinct possibility with the American Opportunity credit) or because your income is too high (a distinct possibility with the Lifetime Learning credit). Don’t give up hope. There is another important break that might work for you.

Claim Page 1 Deduction for Education Expenses

Our beloved Internal Revenue Code allows you to claim a limited deduction for qualified tuition and fees on page 1 of Form 1040. The good thing about the page 1 deduction is you don’t have to itemize to benefit. Depending on your income, the maximum write-off is either $4,000 or $2,000 (more on that later).

Eligibility Rules and Qualified Expenses:

You can’t claim the page 1 deduction for your own tuition and fees if you claim either the American Opportunity credit or the Lifetime Learning credit for your own expenses. No double dipping! However, you’re allowed to claim the deduction while claiming a credit for expenses incurred for your spouse or child.

You’re ineligible for the deduction if you’re married and don’t file a joint Form 1040.

Also, the IRS says you must already have a high school diploma or GED in order to claim the deduction.

Qualified expenses include tuition, mandatory enrollment fees, and course materials including books and supplies. However, the IRS says you can only deduct books and supplies if you’re required to purchase them directly from the school. And you can’t deduct optional fees for things like student activities and insurance. Room and board costs are off limits too.

The tuition and fees must be to attend an eligible institution. Virtually all accredited public, nonprofit, and for-profit postsecondary schools pass this test, as well as some vocational schools. Eligible institutions are given Federal School Codes, which you should be able to verify online at www.fafsa.gov.

Robert Pernell / Shutterstock.com

Although you can only claim the page 1 deduction for expenses to attend an institution that offers some sort of postsecondary degree or credential, you don’t actually have to pursue a degree or credential to claim the deduction. For example, you can claim it for career-related courses and professional certification courses offered by a university, community college, or any other eligible institution.

Finally, you can claim a 2013 deduction for qualified tuition and fees that you pay this year for courses in academic periods that begin either this year or in January through March of 2014. So prepaying some expenses that are due early next year before the end of this year could lower your 2013 tax bill.

Maximum Deduction and Income Cut-Off Rule:

If you’re unmarried with modified adjusted gross income (MAGI) of $65,000 or less, the page 1 deduction equals the lesser of: (1) $4,000 or (2) 100% of qualified tuition and fees. Ditto if you’re a married joint filer with MAGI of $130,000 or less ($4,000 is the maximum deduction even when both spouses have qualified expenses).

If you’re unmarried with MAGI between $65,001 and $80,000, the maximum deduction is reduced to the lesser of: (1) $2,000 or (2) 100% of tuition and fees. Ditto if you’re a married joint filer with MAGI between $130,001 and $160,000 ($2,000 is the maximum deduction even when both spouses have qualified expenses).

If your MAGI exceeds the $80,000 or $160,000 ceiling (whichever applies), you get no deduction at all. Sorry.

MAGI means “regular AGI” from the last line on page 1 of your Form 1040 increased by certain tax-exempt income from outside the U.S. and the deduction for domestic production activities. (These adjustments are rather unlikely to apply to you.)

What If I Could Claim Either the Deduction or a Credit?

Good question, because it can happen. As I said earlier, you can’t claim both the page 1 deduction and the American Opportunity credit or the Lifetime Learning Credit for expenses incurred by the same student (you in this case). So you have to pick Door No. 1 or Door No. 2.

If you qualify for the rather generous American Opportunity credit, it will deliver more tax savings than the deduction in any situation I can imagine. So claim the credit.

In the more common scenario where you qualify for the Lifetime credit but not the American Opportunity credit, it can sometimes be a close call in figuring out whether the Lifetime credit or the deduction will cut your tax bill more. The trade-off gets complicated because it depends on the amount of qualified education expenses, your marginal tax rate, and whether the credit phaseout rules apply. The only sure way to find out which break is best is to fill out Form 8863 to calculate the credit and Form 8917 to calculate the deduction. Then complete the rest of your return to see which one lowers your tax bill the most. Pick that one. 

The IRS' Untold Secret: Tax Loss Harvesting / Tax loss harvesting: The trick the IRS does not want you to know about.

Constantinos (Dean) Pagonis for Seeking Alpha writes: Tax loss harvesting: The trick the IRS does not want you to know about.   The IRS has a not so fun rule called the wash sale rule. The gist of the rule is that if you sell a security, you cannot buy back the security or a security that is materially similar for thirty days. You have to wait until the thirty-first day to repurchase the security. If you do buy back the security, the IRS will adjust your basis, or cost at which you calculate your gains on your original position, back up to the original sale price.

The Wash Sale rule

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It's a very good thing that the tax code is written by and for the wealthy because the IRS has a huge loophole that allows you to take a tax loss and keep holding the same exposure to your asset class. The IRS will only consider a sale a wash sale if the security you purchased is materially similar. If the security follows a different index or is constructed using a substantially different methodology, than the IRS will likely not consider the security materially similar.

For example, swapping from SPDR S&P 500 (SPY) to iShares S&P 500 (IVV) would probably not be permitted as both securities follow the same index and are constructed almost identically. However, the IRS does not care at all about the correlation of two assets. As a result, you can swap between two securities that are highly correlated but follow different indexes. For example, iShares Dow Jones Industrial (DIA) is 98-99 percent correlated to the S&P 500, meaning it will provide a virtually identical return in short run, but because it follows a different index, the IRS will most likely allow the swap. Please consult a tax attorney and CPA before making a decision on the taxability of a tax loss harvest transaction.

Note: It is theoretically possible to use a tax swap for individual stocks in the same industry, such as Coke (KO) and Pepsi (PEP), but it is not advisable because company-specific risks can make correlations change drastically, especially around earnings releases.

Why tax loss harvest?

Tax loss harvesting allows you to maintain an investment in a particular asset class while simultaneously booking a tax loss. When done correctly, tax loss harvesting costs nothing other than trading commissions and gives you a tangible tax savings that you get back. It is one of the few truly free lunches. Short-term tax losses (less than one year) can be used to offset $3,000 in income and offset any other short- or long-term gains you generate. Long-term tax losses can offset other long-term gains. In falling markets, tax loss harvesting allows you to bank losses that you can use in the future to eliminate gains that you develop as the market rises.

A tax loss's value will vary according to your tax rate. To calculate the value of a short-term tax loss, multiply the dollar value of the tax loss by your tax rate. For example, if you are in the 25 percent tax bracket and the tax loss is $200, you would receive a benefit of $50 ($200 times 25 percent, or $50). Long-term capital gains are taxed at 15 percent, so simply multiply the tax loss by 15 percent.

How to tax loss harvest or tax swap

The first step in tax loss harvesting is identifying three or more swap candidates that are highly correlated to your security. Why three or more? When the market is falling you may be able to initiate multiple tax swaps, so you need to prepare for that eventuality. Thus, when the security falls, you are in a position to swap. Put the most correlated security as your first swap candidate, the second most correlated as your second swap, etc.

If you have access to a Bloomberg terminal, you can simply pull each security's correlation to one another. People outside of finance can calculate correlation by taking the returns of both securities from Yahoo Finance's historical prices data, converting the prices to price changes, and then using the correl function in Excel to calculate correlation. An even easier method is to simply Google the tax loss swap you want to complete and see if it is recommended by others.

Establish a threshold for tax loss harvesting. I usually use a 5 percent loss as a good minimum, but on smaller positions where commissions are high as a percentage of the transaction, you may want to use a higher threshold, such as 10 percent. Once you have identified a threshold and multiple swap candidates, sell the security that you want to take a loss on and buy the swap security. After thirty days, if the security continues to fall or stays at the same level, sell the security and swap back into the original security. If the security falls more than 5 percent below your purchase price at any point, you can swap into your second candidate, but it will restart the thirty-day clock. If the security rises, maintain your position in the security indefinitely.

Steps:

1. Identify three tax swap candidates that are 98-99 percent correlated.
2. One of your securities falls more than 5 percent below your purchase price
3. Sell the security and buy the first swap candidate.
4. Swap security goes down more than 5 percent in less than thirty days. If it does, sell the first swap security and buy the second swap security. If the second swap security continues to fall 5 percent below your purchase price, swap the second security for the third, or if thirty days have passed, purchase the original security.
5. Thirty days have passed and the swap security has risen in price. Hold the security indefinitely.
6. Multiply the dollar value of each loss by your tax rate to get the value of the tax loss.

Tax loss harvesting

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Tax Dollars for Private School Tuition Gain in States

Elaine S. Povich, for Pew Stateline writes: Opponents called it a “bombshell” and “sleaziness.”  Backers said it was “historic” and would free low-income students from failing public schools. Hyperbole aside, the Alabama Legislature’s last-minute move to create a $3,500 state tax credit for private school tuition is emblematic of a growing movement in the states.

Thirteen states created or expanded tuition tax credits, private school scholarships or traditional vouchers in 2013, according to the National Conference of State Legislatures. Eight states did so in 2012 and seven states in 2011, according to the group.

Private school vouchers have been around for quite a while.  But some state supreme courts have questioned the constitutionality of giving parents public education dollars to send their children to parochial schools.

To get around that issue, states have turned to strategies that are less direct. Some have created tax credits for parents who pay private school tuition. Others are giving tax credits to those who donate to private scholarship funds that dole out money to families who need help paying for private school.

•   Two states — Alabama and South Carolina — created new scholarship tax credit programs in 2013. Six states— Georgia, Indiana, Iowa, Pennsylvania, Rhode Island and Virginia — expanded their existing programs. With the exception of Rhode Island and Iowa, Republicans control both the legislature and governor’s office in those states.

•   North Carolina instituted a new statewide voucher program for low-income students. Additionally, five states—Indiana, Mississippi, Ohio, Utah and Wisconsin — expanded existing voucher programs.  All of those states are controlled by the GOP.

•   Wisconsin also created a tax deduction for private school tuition and fees.

Purchasing power under private school choice programs ranges from a maximum of $250 in Iowa (personal tax credits), to 115 percent of per-pupil public school funding in Maine (for private school vouchers), according to Jeff Reed, communications director for the Friedman Foundation for Educational Choice, a pro-vouchers and tax credits group.

No matter the approach, the effect is the same, according to Josh Cunningham, an education policy analyst at NCSL.  “The state is saying we’re going to forgo tax revenue for the purpose of encouraging students to transfer from the public school system into the private schools,” he said.

Fight in Alabama

In Alabama’s legislature this spring, a conference committee considering a much narrower piece of education legislation suddenly expanded it—with little debate—to include the scholarship tax credit and a personal tax credit for private school tuition, drawing howls of protest from Democrats and teacher groups.

It took until the middle of June for the state education department to come up with the list of 78 “failing” schools. It defines a “failing” school as one that lands in the bottom 6 percent of state standardized tests three or more times in six years, or one listed as “low performing” in the state’s most recent school improvement grant application.

The Alabama Education Association, which represents the state’s public school employees, filed a lawsuit to block the plan, but courts have allowed it to proceed. More legal action is pending, but for now the race is on for interested parents to pull their kids out of public schools, sign up for admission to private schools, and take advantage of the $3,500 tax credit program before school starts in a few weeks.  Lawmakers expect a bigger impact next year.

The effect on states’ treasuries is up for debate. In a widely-cited 2008 study, Florida estimated it saved $1.49 in per-pupil costs for every $1 it lost in revenue due to the private school tax credits, for a total of $39 million. But other estimates say states lose money on the tax incentives.

Alabama, for example, put aside $40 million in its budget to absorb the anticipated loss from the tax credits, according to Norris Green, director of the Alabama Legislative Fiscal Office.  “Our sense is that $40 million is going to be enough but we don’t know. It’s a question of how many are going to opt for private schools,” he said. Some $25 million of that total represents lost revenue from the tax-exempt donations to the scholarship funds, and the tax credits to parents who send their kids to private schools account for the rest.

Alabama state Sen. Del Marsh, author of the tuition tax credit program, said his state is being “very responsible” in putting money aside to fund the credits, noting that with Republicans in charge of the legislature the time was ripe to pass the credits. The Anniston Republican also predicted that the program will generate some long-term savings.

“We have an extremely high dropout rate from high school. Many of those incarcerated in prison do not have a high school diploma. The more we can keep in school to get more education, the less likely they will be to end up in the prison system,” he said.  One in four Alabama high school students does not graduate.

But the Alabama Education Association, like the American Federation of Teachers and other teachers’ groups across the country, opposes the private school tuition tax credit program, on both fiscal and ideological grounds.

“It’s very disheartening, at a time when we are seeing revenue actually go up,” said Amy Marlowe of the association. “That’s money we do have available to spend on (public) education and it’s going to be funneled to private schools.”

Rosier Revenues

Recovering state revenues are fueling the growth of such programs. For a decade, South Carolina failed to approve a tax credit scholarship program, but it succeeded this year. Wisconsin, which had a voucher program limited to the Racine area, expanded it this year statewide, with up to 500 more students eligible this year and 1,000 next year at a cost of $14 million.

North Carolina replaced its tax credit program with a voucher plan. The vouchers are worth up to $6,000 a year so that low-income families with no taxable income are eligible to participate. Iowa increased its cap on the total value of the tax credits it will grant to $12 million from $8.75 million, and Georgia increased its cap to $58 million from $50 million, according to the Friedman Foundation.

Reed, the Friedman spokesman, emphasized that many of the programs are income-limited or limited to families with special-needs kids. Some 23 states and the District of Columbia now have some kind of program to support private education with state dollars, according to the foundation.

The movement did suffer some defeats this year: In six states, tax credit or voucher programs were proposed but failed to become law. In Montana, a tax credit program was approved by the Republican-led legislature but was vetoed by Gov. Steve Bullock, a Democrat. Texas, too, was unable to get a required super-majority in the legislature to approve the programs.

School Choice Programs
State	Title	Type
AL	Alabama Accountability Act of 2013 School Choice Tax Credit/Rebate	Individual Tax Credit
AL	Alabama Accountability Act of 2013 School Choice Scholarships	Tax Credit Scholarship
AZ	Personal Tax Credits for School Tuition Organizations	Tax Credit Scholarship
AZ	Corporate Tax Credits for School Tuition Organizations	Tax Credit Scholarship
AZ	Lexie’s Law Corporate Tax Credits	Tax Credit Scholarship
AZ	Empowerment Scholarship Accounts	Educational Savings Account
CO	Choice Scholarship Pilot Program	Voucher
DC	Opportunity Scholarship Program	Voucher
FL	John M. McKay Scholarships for Students with Disabilities Program	Voucher
FL	Florida Tax Credit Scholarship Program	Tax Credit Scholarship
GA	Georgia Special Needs Scholarship Program	Voucher
GA	Private School Tax Credit for Donations to Student Scholarship Organizations	Tax Credit Scholarship
IA	Education Expense Credit	Individual Tax Credit
IA	School Tuition Organization Tax Credit	Tax Credit Scholarship
IL	Tax Credits for Educational Expenses	Individual Tax Credit
IN	School Scholarship Tax Credit	Tax Credit Scholarship
IN	Choice Scholarship Program	Voucher
IN	Tuition Tax Deduction	Individual Tax Deduction
LA	Elementary and Secondary School Tuition Deduction	Individual Tax Deduction
LA	Student Scholarships for Educational Excellence Program	Voucher
LA	School Choice Pilot Program for Certain Students with Exceptionalities	Voucher
LA	Tax Credit for Donations to School Tuition Organizations	Tax Credit Scholarship
ME	Town Tuitioning Program	Voucher
MN	K-12 Education Subtraction and K-12 Education Credit	Individual Tax Credit/Deduction
MS	Mississippi Dyslexia Therapy Scholarship for Students with Dyslexia Program	Voucher
MS	Nate Rogers Scholarship for Students with Disabilities Program	Voucher
NC	Tax Credits for Children with Disabilities	Individual Tax Credit
NH	School Choice Scholarship Program	Tax Credit Scholarship
OH	Cleveland Scholarship and Tutoring Program	Voucher
OH	Autism Scholarship Program	Voucher
OH	Educational Choice Scholarship Program	Voucher
OH	Jon Peterson Special Needs Scholarship Program	Voucher
OK	Lindsey Nicole Henry Scholarships for Students with Disabilities	Voucher
OK	Oklahoma Equal Opportunity Education Scholarships	Tax Credit Scholarship
PA	Educational Improvement Tax Credit	Tax Credit Scholarship
PA	Educational Opportunity Scholarship Tax Credit	Tax Credit Scholarship
RI	Tax Credits for Contributions to Scholarship Organizations	Tax Credit Scholarship
UT	Carson Smith Special Needs Scholarship Program	Voucher
VA	Educational Opportunity Scholarship Tax Credits	Tax Credit Scholarship
VT	Town Tuitioning Program	Voucher
WI	Milwaukee Parental Choice Program	Voucher
WI	Parental Private School Choice Program (Racine)	Voucher
Source: The Friedman Foundation For Educational Choice

New Accounting Rules For Gift Cards Redeemable By Unrelated Entities / IRS modifies rules allowing the deferral method of accounting for advance payments received for the sale of gift cards that are redeemable by an unrelated party.

Anne Marie Estevez, Gregory T. Parks, Charles G. Lubar, Richard S. Zarin, Barton W.S. Bassett,William F. Colgin, Jr., Paul A. Gordon and William P. Zimmerman for Morgan Lewis write:  On July 24, the Internal Revenue Service (IRS) released an advance copy of Revenue Procedure 2013-29, which clarifies when a taxpayer may defer recognizing, in gross income, certain advance payments received from the sale of gift cards that are redeemable for goods or services by an unrelated party. This revenue procedure modifies and clarifies Revenue Procedure 2011-18, which modified and clarified Revenue Procedure 2004-34.

Revenue Procedure 2013-29 states that, where a gift card is redeemable by an entity whose financial results are not included in the taxpayer's applicable financial statement (AFS), the taxpayer will recognize the payment in income to the extent the gift card is redeemed. For a taxpayer without an AFS, the taxpayer will recognize the payment in income when it is earned, which, in this situation, is when the gift card is redeemed. Any payment received by the taxpayer that is not recognized in income in the year of receipt must be recognized in the subsequent year.

Retail companies should consult their legal advisers with respect to the application of this revenue procedure to their sale of gifts cards or gift certificates.

Background

Under the deferral method of accounting provided in Revenue Procedure 2004-34, an accrual method taxpayer that receives an advance payment for goods or services must include the advance payment in gross income in the taxable year of receipt to the extent recognized in revenues in the taxpayer's AFS for that taxable year. For a taxpayer without an AFS, an advance payment must be included in gross income to the extent earned in the taxable year of receipt. Any portion not included in gross income in the year of receipt must be included in gross income in the next succeeding taxable year.

Revenue Procedure 2011-18 expanded the definition of "advance payment" provided in Revenue Procedure 2004-34 to include an "eligible gift card sale" and allowed a taxpayer that sells an eligible gift card redeemable through another entity (that may or may not be related to the taxpayer) to use the deferral method of accounting.

To qualify as an advance payment, the payment must be recognized by the taxpayer (in whole or in part) in revenues in its AFS for a subsequent taxable year, or, for taxpayers without an AFS, the payment must be earned by the taxpayer (in whole or in part) in a subsequent taxable year.

However, if a gift card is redeemed by an unrelated entity whose financial statement revenues are not consolidated with the taxpayer's revenues on the taxpayer's AFS, the taxpayer will never recognize any portion of the gift card sale proceeds in revenues in its AFS because that revenue is accounted for only by the unrelated redeeming entity upon the sale of goods or services. Similarly, for a taxpayer without an AFS, the payment is never earned by the taxpayer because the payment is earned by the unrelated redeeming entity.

Revenue Procedure 2013-29's Modification of "Eligible Gift Card Sale"

The U.S. Department of the Treasury and the IRS have concluded that a taxpayer should not be precluded from using the deferral method of accounting provided in Revenue Procedure 2004-34 solely because the taxpayer never recognizes payments from an eligible gift card sale in revenues in its AFS, or, for taxpayers without an AFS, never earns payments from an eligible gift card sale.

Accordingly, Revenue Procedure 2013-29 modifies the term "eligible gift card sale" to provide that an eligible gift card sale is the sale of a gift card (or gift certificate) if (1) the taxpayer is primarily liable to the customer (or holder of the gift card) for the value of the card until redemption or expiration and (2) the gift card is redeemable by the taxpayer or by any other entity that is legally obligated to the taxpayer to accept the gift card from a customer as payment for qualifying items. If a gift card is redeemable by such other entity whose financial results are not included in the taxpayer's AFS, a payment will be treated as recognized by the taxpayer in revenues in its AFS to the extent the gift card is redeemed by the entity during the taxable year. For a taxpayer without an AFS, if a gift card is redeemable by such other entity, including an entity whose financial results are not included in the taxpayer's financial statement, a payment will be treated as earned by the taxpayer to the extent the gift card is redeemed by the entity during the taxable year.

QuickBooks CRM Integration Webcast Event Salesforce Vs. SugarCRM

Faye Business Systems Group is pleased to present this QuickBooks CRM comparison webcast event. Faye Business Systems Group will discuss the top nine points to consider when integrating CRM with QuickBooks and how these nine points relate to both SugarCRM and Salesforce from the QuickBooks users perspective.

Most businesses at some stage or another are faced with the challenge of implementing CRM and ERP software to manage day to day operations. However, the planning of the integration between the front office CRM and the back office ERP (QuickBooks accounting software) is often overlooked. As a consequence, CRM and ERP applications have the potential to become stand alone silos with no data effectively passing back and forth. This leads to double work and performing tedious manual tasks. Critical data that should be available to one group of users is not available without laborious processes.

Join Faye Business Systems Group on Thursday, August 15, 2013 to learn nine critical points a QuickBooks user should consider when comparing Salesforce to SugarCRM. Kimberly Douglass of Faye Business Systems Group will lead this presentation.

Title: QuickBooks CRM: 9 Points to Consider When Comparing Salesforce vs. SugarCRM QuickBooks CRM Integrations

Date: Thursday, August 15, 2013
Time: 10:00 AM - 11:00 AM PT
Register here: http://fayebsg.com/quickbooks-crm/.

Topics to be discussed: 

•      Value & Total Cost of Ownership
•     QuickBooks Integration
•     Architecture - Open VS. Closed
•     Limitations
•     Deployment Options
•     Data Control & Accessibility
•     Why CRM Implementations Fail and What to Watch Out For
•     Hidden Implementation Costs
•     Third Party Integrations

Who Should Attend:

•      SugarCRM customers & partners
•     QuickBooks customers & partners
•     VPs, Directors and Managers of Sales
•     General Managers
•     Finance and Sales Operations professionals

Faye Business Systems Group created the QuickBooks SugarCRM integration to address the growing demand QuickBooks users have for an integrated CRM solution.

The QuickBooks SugarCRM integration allows the user to enter sales orders in SugarCRM and have the orders synced into QuickBooks in real-time. Orders can be entered on laptops, ipads, and other mobile devices by salespeople on the road. The QuickBooks SugarCRM integration eliminates the need to email orders into the office or to wait for remote access to QuickBooks. Orders entered in SugarCRM appear in QuickBooks, eliminating the need for redundant data entry and associated errors. Inventory changes and customer name and address changes in one system can be instantly updated in the other as well. Attendees will learn how the QuickBooks SugarCRM integration eliminates the need for expanding QuickBooks user licenses by seeing QuickBooks data in SugarCRM. Attendees will learn how sales representatives using the SugarCRM QuickBooks integration can see on hand inventory quantities, open sales orders, invoice history, customer credit information, and everything they need to view in QuickBooks from SugarCRM. Companies can now potentially downgrade QuickBooks user licenses because the sales representatives see all necessary information from SugarCRM and no longer need access to QuickBooks.

The QuickBooks SugarCRM integration extends the functionality users have become accustomed to in the back office to the front office. The QuickBooks SugarCRM integration allows for a single view of customer interactions with your company. Learn how sales teams become focused on the company profit objectives using QuickBooks and SugarCRM combined to provide an enterprise-wide, consistent view of customer activity and opportunities. QuickBooks and SugarCRM users should attend this presentation if they have to key in information from one system to another, have lost customers due to improper communications and/or if sales people can assist in speeding up the collection of outstanding accounts receivable.

Massachusettes Department of Revenue Issues FAQs Regarding New Sales Tax On Computer Services

Perhaps a harbinger of what's to come for the rest of the U.S., let's see how Massachusettes is handling taxing computer-software services by reading Richard W. Giuliani for Wilmer Hale who writes: On July 31, 2013, the Massachusetts Department of Revenue published responses to some frequently asked questions (FAQs) it received after the publication of Technical Information Release (TIR) 13-10 regarding the new sales tax applicable to computer system design services and the modification, integration, enhancement, installation or configuration of prewritten software. Please see our prior Client Alert on TIR 13-10.

Custom Software

The FAQs clarify that, in general, custom software (that is not based on prewritten software) is not subject to sales tax under the new law. If software that is licensed, sold, or otherwise made available to more than one user (generally, prewritten software) is modified for the use of a specific customer (which might otherwise be considered customization), such modification is subject to the new sales tax. Prewritten software does not include proprietary code owned by the seller of the modifications if the proprietary code is not separately licensed to the customer. Therefore, custom application software (including custom software that incorporates such proprietary code) that is designed to run on a prewritten operating system is treated as custom software, which is not subject to the tax, and not as a modification of the prewritten operating system software. However, if a seller customizes Open Source (free) software and sells it to one or more customers to be used on any electronic device, that customized software is subject to tax.

Website Design

The FAQs also address whether website design is a taxable service. If the website designer is configuring or modifying Open Source code or other prewritten software for the needs of a customer, the designer's charges to that customer are subject to the sales tax. If the website designer is creating custom software for its customer (that is not based on other prewritten software), then the charges are not subject to the sales tax.

Computer System Design Services

The FAQs generally do not provide additional information regarding the scope of computer system design services. The FAQs do provide that if a computer system is designed but not actually built, so software is never actually integrated with hardware, the sales tax does not apply to the design or consulting services. The tax only applies to design or consulting services that result in a sale of a computer system that integrates computer hardware, software or communication technologies. The FAQs also indicate that designing and implementing of a local area network (LAN) and adding functionality and/or workstations to a LAN fall within the definition of computer system design services.

Non-Taxable Services

The FAQs also provide that, in general, the following services are not taxable:

• troubleshooting computer services;
• technical support and training;
• website hosting;
• data storage;
• disaster recovery and backup services; and
• data conversion and data migration.

The FAQs leave many questions unanswered, such as how a purchaser is to determine whether certain services are subject to the use tax and questions regarding sourcing. The DOR has indicated that it intends to update these FAQs as additional inquiries are received. View a copy of the FAQs.