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Talk of new sales tax makes MSPs anxious

Potential new sales tax could put managed service providers and HaaS players at risk.

As more states consider a new sales tax to balance recession-strained budgets, managed service providers and others in the IT services business should pay attention.

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For the many VARs that rely on managed services revenue and that are moving into Hardware as a Service (HaaS), a new sales tax could mean big problems.

Charles Weaver, president of the MSPAlliance, is concerned that this push for a new sales tax, surfacing most recently in Florida, could impact IT business services offered by MSPs and VARs.

As MSPs and VARs begin to directly buy more IT equipment and become Hardware-as-a-Service (HaaS) providers vs. selling hardware directly to business customers, this could be a particularly tough issue, Weaver said.

"There's been an unrecognized storm gathering … for the way vendors sell and the way [managed service providers] buy from their vendors," Weaver said. Under a HaaS model, that means that the MSPs buy the hardware and then pay sales taxes on it.

Then when they sell services to customers, taxes can also be charged to customers on those transactions in many states. For MSPs and VARs, the new sales tax on them directly increases their cost of doing business, Weaver said.

"I think that there's going to be a surge in MSPs buying on a lease basis," he said, "or on something other than as a capital expenditure."

Shift in tax landscape for managed service providers

These shifts in the IT tax landscape are popping up in other areas as well. As most state governments scramble for additional tax revenues, many of them are proposing new taxes for a wide variety of professional services, including IT services and lawyers' fees. In Pennsylvania, legislation under review would implement new services taxes on 71 types of business services. Some states already charge taxes on IT services.

If new IT services taxes are implemented in states that don't already have them, the concern is that business customers might cut their IT services expenditures a corresponding amount to make up the difference.

In this country, the generally accepted practice of not charging taxes for business services is coming under fire.

"What we're concerned about is the misuse of existing tax laws to access these [new revenues]," Weaver said. His group is hosting workshops across the country to educate MSPs on this trend.

Peter Hirschfeld, president of Personal Computer Resources, a VAR in Braintree, Mass., said that a new sales tax on business services would set a bad precedent. He hasn't heard of this particular proposal so far in Massachusetts, but if it were enacted it could cut into his revenues if customers had to cut back on their services.

"Basically we're taxed at every turn in our state," Hirschfeld said. "They just increased the sales tax last year. I would see that as potentially something that would affect our business."

Jason Harrison, president of Harrison Technology Consulting, a VAR in Nashville, N.C., said that while a tax on IT services doesn't exist in his state, he would oppose it if it is proposed.

"Any state that tries to push something like that through will have a real battle," Harrison said via e-mail. "I think states will have to get something in place to tax goods purchased over the Internet" to help balance their budgets in lieu of seeking more tax revenue from businesses. "It's going to have to happen across the board or we will continue to see major revenue problems for state and local governments."

Harrison said that the new sales tax would have a negative impact on his business. "It would increase our regulatory internal paperwork, which would slightly increase our operational overhead," he wrote.

One MSP, though, said he already has to deal with charging state taxes on his IT service billings to customers and that it hasn't been a major hassle. Brian O'Shaughnessy, president of ITConnexx Inc., an MSP in Green Bay, Wis., said he's had to collect IT services taxes from his customers for years, then forward the money to the state. The tax is charged for IT services he provides but not for IT consulting.

"Other than … having a little bit of extra paperwork each month that probably takes an hour, we don't notice it," O'Shaughnessy said. "I don't have anybody questioning that I charge them sales tax. And I don't have any clients who say they won't [hire] me if I charge the tax. I don't know if it would impact an MSP as much as they think it would, other than extra paperwork."

Another Philadelphia area VAR said that new laws could hurt VARs and MSPs, many of which are the kinds of small businesses that have disproportionately suffered during the recession.

"This just shows how out of touch our elected officials are," he said. "The computer services industry has been very hard hit in this recession. We had the worst year in 31 years. Will [any taxes also] apply to offshore work? If not, one more reason to send it offshore."

ABOUT THE AUTHOR: Todd R. Weiss is an award-winning technology journalist and freelance writer who worked as a staff reporter for Computerworld.com from 2000 to 2008. He spends his spare time working on a book about an unheralded member of the 1957 Milwaukee Braves and watching classic Humphrey Bogart movies. Follow him on Twitter @TechManTalking.

Let us know what you think about the story; email Barbara Darrow, Senior News Director at bdarrow@techtarget.com, or follow us on twitter.

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