The Minnesota Supreme Court just issued its opinion in LumiData, Inc. vs. Commissioner of Revenue (Sept 10, 2014). The case involves the appeal by LimiData to a ruling by the Minnesota Tax Court stating that the sale of the software sold by LimiData was fully taxable even though significant customization took place. Minnesota law very clearly states that separately stated software modification costs are not taxable. However, LumiData did not separately state the modification charges and just billed its customers a lump-sum for the software and claimed it was all “custom” software which is not taxable. The Supreme Court pointed out that the core software product was the same for each customer but that the core software had to be modified to fit each specific customer. If LumiData had separately stated the customization costs, then LumiData would only have been required to charge tax on the core software product. http://www.salestaxstrategies.com/index.html
At the Tax Court level, the accountant for LumiData testified that based on her understanding of LumiData’s business, she had advised them that they were providing a nontaxable sale of customized software. However, it was revealed the accountant never inquired about the degree of customization that took place of the software, she was not aware that LimiData was not registered for sales tax, and she was not not aware of the Minnesota requirement that customization services be separately stated. Based on the Tax Court transcript, I’m not sure what basis the accountant had for rendering her opinion on the taxation of the LumiData product other than just guessing!
The unfortunate thing is that this same scenario plays out each day in accounting and CPA firms located throughout the country. Professionals that are busy or are unprepared to handle these types of questions nonetheless render opinions that can have significant implications to their clients. If you are a CPA or a tax professional and you have clients that are asking you questions about these sorts of things please contact me for help if you are not familiar with the issues. As you can see from this case, the cost of your mistakes can be significant.
I hope that the accountant has sufficient malpractice insurance!
Ned Lenhart, CPA