The Massachusetts Department of Revenue recently issued a working draft of proposed changes to Massachusetts Regulations Section 64H.1.3, dealing with computer industry services and products.
Issued May 30, Draft Proposed Regulations Section 64H.1.3 would incorporate the statutory changes found in Technical Information Release 05-15 (40 DTR H-1, 3/1/06), which deals with sales and use tax on prewritten software, the department said in the preface to the working draft.

The draft regulation stated that, generally, sales in Massachusetts of computer equipment, prewritten computer software, regardless of the method of delivery, and reports of standard information in tangible form are subject to sales tax.

"Taxable transfers of prewritten software include sales effected in any of the following ways regardless of the method of delivery, including electronic delivery or load and leave: licenses and leases, transfers of rights to use software installed on a remote server, upgrades, and license upgrades," the draft regulation provided, indicating that the vendor collects and pays the sales tax.

The use, storage, or other consumption of computer equipment, prewritten computer software, regardless of the method of delivery, and reports of standard information in tangible form purchased for use, storage, or other consumption in the state is subject to use tax, the draft regulation said.

The draft regulation also stated exceptions to the use tax and addresses the collection and payment of the use tax.

Non-taxable sales for purposes of the sales and use tax include sales of custom software, personal and professional services, and reports of individual information, according to the draft regulation.

Multiple Points of Use Certificates

The working draft also would add a new section on multiple points of use certificates.

The draft regulation would provide that a business purchaser who is not a direct pay permit holder and knows at the time of its purchase of prewritten computer software that the software will be used in more than one jurisdiction must provide the seller an exemption certificate claiming multiple points of use. The draft regulation also would provide that computer software for personal use will not be considered prewritten computer software.

The seller is relieved of all tax obligations on receipt of the exemption certificate and the purchaser must collect, pay, or remit the tax on a direct pay basis, the draft regulation indicated.

The draft regulation also addresses the apportionment of the sales price and provides examples.

Text of this Massachusetts working draft is available on the Internet at  http://www.dor.state.ma.us/rul_reg/reg/830_cmr_64H_1_3_draft.htm

Article from "BNA Daily Tax Report No. 116, Friday June 16, 2006"

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All tax preparing firms are under a mandate from the Massachusetts Department of Revenue to electronically file individual tax returns prepared. While the e-file process has its advantages, there are issues that pop up from time to time that slow down the process or generate tax notices from the DOR. Most of these issues are avoidable and the tips below can greatly enhance the e-file process both for you as the taxpayer and for us as the tax return preparer.

Some of the most common avoidable issues are:

• Please make sure we have a correct social security number for newborn children.

• If you have recently gotten married and legally changed your name, please make sure the Social Security Administration has been informed of the change before you file your return.

• If you have college-aged children and we do not prepare those children's tax returns, please let us know whether or not those children have claimed their own exemption on their tax return.

• Please provide to us an accurate record of any federal or state estimated payments that you have made.

• If you receive unemployment compensation or Massachusetts State Lottery winnings, please provide us copies of the documentation for the income as the DOR does have a record of those payments and matches it against your e-filed return.

• We ask that when you receive your tax return package from us, that you not delay in returning the signed e-file authorization forms.

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Businesses paid $497 billion in state and local taxes in fiscal year 2005, representing 44 percent of total taxes collected by all state and local governments, according to the annual study prepared by the Quantitative Economics and Statistics Practice (QUEST) of Ernst & Young, in conjunction with the Council On State Taxation (COST).

The study includes estimates of taxes paid by major industry groups, such as property tax, sales tax, excise and gross receipts taxes, corporate income and franchise taxes, license taxes, unemployment taxes, and individual income taxes paid by owners of non-corporate businesses.

The share of taxes paid is determined by a state's overall tax system, the structure of its economy, the types of business taxes levied, as well as business tax features that may provide a competitive advantage or disadvantage in attracting and retaining business employment and investment.

Key findings include:

• Over the last four years, state and local taxes on business rose faster than total state and local taxes.  Businesses paid 48 percent of the entire increase in state and local taxes from 2002 to 2005.

• Property taxes on business property were nearly $183 billion in 2005, accounting for 37 percent of total state and local business taxes.

• Corporate income tax represents only eight percent of total state and local business taxes nationally, but has risen 44 percent since 2002.

• Individual income taxes paid by owners of non-corporate businesses totaled $19 billion in 2005, representing four percent of total state and local business taxes.

• Manufacturing and transportation continuing to face significant property and sales taxes on business property.

Article from "Practical Accountant" May 2006 Issue

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In today’s business world, it’s commonplace for a business entity to transact business with customers in many states. Unfortunately, recognizing when that business rises to the level of subjecting the entity to multiple reporting and taxation requirements isn’t quite so commonplace. And, as states become more sophisticated in their data mining, more and more business are finding themselves in hot water for due sales, income and franchise taxes. Furthermore, with the increasing popularity of LLCs and other flow through entities, many individual owners are finding themselves personally liable for state income taxes on their proportionate share of the flow through entities income.

With that in mind, we thought it would be a good time for a primer on multistate tax rules. Typically, an entity conducting business in a particular state is potentially subject to three (3) different types of taxes: franchise, sales and income.
 

Franchise: Generally, a business must register in every state in which it conducts business. Usually, this requires the business to pay a franchise tax, normally as an annual event. It may also require the business to file an annual report listing its officers and directors. However, sometimes the franchise tax is incorporated in the state’s income tax.

Sales Tax: For state sales or income taxation to occur, some nexus must exist. Nexus is simply defined as sufficient contact with a state to enable the state to impose sales taxes (and other taxes) on the business. Whether nexus applies depends on the particular set of facts, and the state’s statutes and regulations. However, a general rule is that sales tax will apply on sales within a state, even if income tax won’t be imposed on the seller because of lack of nexus for income tax purposes.

State Income Tax: The third major state and local tax issue involves income taxes. The income tax rules tend to follow the franchise tax rules discussed earlier. Nexus for income taxation usually requires more than a sale in the state through solicitation. Generally, nexus is created for income tax purposes if a company earns income from sources within the state, owns or leases property in the state, has employees engaged in activities that exceed mere solicitation within the state, or has property in the state.

How can you avoid the pitfalls of state taxation? The answer is to properly track sales and notify your KAF tax professional when sales or physical presence is established in a new state. The importance of early identification of potential tax and reporting obligations can’t be overstated, since monthly sales tax reports are usually required. If not filed, the penalties can mount quickly.

If you would like to discuss your business situation, please contact your KAF tax professional.

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July 2006
	Short Term	Mid Term	Long Term
Annual	5.05%	5.05%	5.29%
Semi annual	4.99%	4.99%	5.22%
Quarterly	4.96%	4.96%	5.19%
Monthly	4.94%	4.94%	5.16%
Adjusted AFR for Original Issue Discount (Code Sec. 1288(b))	3.60%	3.81%	4.43%
Code Sec. 382 Adjusted Federal Long Term Rate			4.43%
Long Term Tax exempt rate			4.45%
Low income Housing Credit (Code Sec. 42(b)(2))
70% present value			8.21%
30% present value			3.52%
Valuation Tables (Code Sec. 7520)			6.00%
Deemed Rate of Return for Transfers to Pooled Income Funds (Code Sec. 642(c)(5))			3.80%

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An increase in complaints in recent weeks about e-mails claiming to be from the IRS that are designed to trick the recipients into disclosing personal and financial information that could be used to steal the recipients' identity and financial assets, triggered an alert from the IRS. Since November, 2005, 99 different scams have been identified; 20 of those in June. The current scams told recipients that they were due a federal tax refund and directed them to a website that appears to be a genuine IRS site. Many of these schemes originated from outside of the United States and many of the more than two dozen IRS-related phishing websites identified were located outside of the United States. In addition, e-mail addresses ending with ".edu" seem to be heavily targeted.

The IRS reiterated that it does not send out unsolicited e-mails or ask for detailed personal information via e-mail. To track down these bogus e-mails, the IRS has established an electronic mailbox where taxpayers can send information about suspicious e-mails. Taxpayers should send the information to: phishing@irs.gov. Instructions on what to do if a taxpayer becomes aware of an IRS-related phishing scam are also found on the IRS website.

Article from "CCH 2006 Tax Day" July 10 2006 Issue

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WebFile for Business is the MA DOR on-line service division which allows taxpayers, business and individuals, the ability to register their business, file and pay taxes. Taxpayers can file current tax period taxes, as well as late returns and make late payments. Taxpayers can also research, update, amend and maintain their tax accounts with the MA DOR 24 hours a day, 7 days a week.

Currently, businesses that collect trustee taxes (withholding, meals and/or sales and use) and have a combined liability of $10,000 or more must file and pay these taxes electronically. Also, all new businesses must use WebFile for Business to register for withholding tax, sales and use tax and sales tax on meals. These businesses are required to file and pay these taxes via WebFile for Business.

In addition, all zero balance due business returns must be filed via WebFile for Business.

For detailed instructions on registering for WebFile for Business please visit our website http://www.kafgroup.com/webfile.html. You will find step by step instructions on how to complete the process. If you have any concerns or questions please contact us at 781-356-2000.

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