Could MSPs Face Sales Tax Audits For Services?

Traditionally, the law stipulates that there is no tax on services rendered by professionals such as doctors and lawyers.

But in the case of MSPs, the state of Florida is considering whether they are providing any products with the services, and if so, the whole thing may be subject to tax, Weaver said.

The results of the Florida audits could have an impact nationwide as states look to increase their tax revenue. The MSPAlliance is investigating the current laws and is preparing materials for MSPs in Florida or elsewhere in case their business model becomes the subject of an audit, Weaver said.

"It brings up hardware-as-a-service and bundled invoicing, practices that MSPs throughout the world do every day. I would wager that the majority are not collecting sales tax on manage services, nor should they. It's not a taxable item," he added.

At least one MSP in Florida is currently undergoing an audit, Weaver said. "This member was offering co-location and data center services and the person wanted to know what is taxable and what is not."

Weaver said Florida's current laws seem contradictory. He notes that on one hand the law says managed router services are not taxable, but co-location services are because they involve hardware that is "lent" to the client.

"This is a messy situation and it's not just in Florida. Every state is going through budget shortfalls and looking at potential revenue windfalls," Weaver said.

Indeed, as spending has dropped in this recession, state sales tax coffers have likewise decreased. In the IT industry, that impact may be even more emphasized because businesses are looking to outsource and employ more virtualized environments, cutting back on the dollars they spend internally on IT infrastructure. States might be looking to recoup some of that money by more closely examining the managed services provider model, Weaver said.

"This is an example of overzealous monitoring, of not understanding what MSPs do. They're trying to take advantage of sloppy accounting and say you provide products, too, so we're going to tax the entire contract amount. This could be a one-year, two-year agreement. There's a lot of revenue here, let's go after it."

The issue has created a storm of interest on MSPAlliance's Web site.

One Florida member, who was not identified, wrote, "The DOR [Department of Revenue] 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."

The MSPAlliance is forming a legislative affairs committee that will include certified public accountants and lawyers to more closely examine state tax laws across the country, Weaver said. In the meantime, the organization has distributed a memo to its members on how to avoid the situation and how to deal with auditors who might not understand the MSP model.

"We've heard of at least two other states where this has happened. Connecticut was one and in Ohio there was a case there where the MSP successfully defended and didn't have to pay the tax," Weaver said.

Still, even winning an audit judgment can be financially damaging to a small MSP.

"All we want is our side of the story to say, 'Here's what MSPs do' and get it disseminated to tax auditors. To say, 'Don't be alarmed if you come across the situation,'" Weaver said.