Attached is a link to a recently prepared State & Local Tax Advisory titled “’Outwit, Outplay, Outsourced’: A Sales and Use Tax Survivor Guide.”
This article was originally published on May 7, 2012, in State Tax Notes, as part of Alston & Bird’s regular column “Audit & Beyond.” See 64 State Tax Notes 379 (May 7, 2012).
When people hear or read about U.S. companies engaging in outsourcing transactions, their immediate reaction is negative because they envision those U.S. companies moving jobs overseas, most notably to India. Indeed, in 2004, during his presidential campaign, U.S. Sen. John Kerry, D-Mass., referred to companies that outsource as “Benedict Arnold” companies. Technically, Kerry is concerned about companies that engage in offshoring, but not all outsourcing involves offshoring. However, the public and media often — and incorrectly — use the terms “outsourcing” and “offshoring” interchangeably. Regardless of the effect on U.S. jobs, there can be no debate about the explosive growth in outsourcing, particularly information technology (IT) outsourcing, both offshore and onshore. This growth, coupled with the expansion by states of their sales and use tax bases, particularly in the area of computer and related technology services, has created significant complexity surrounding the sales and use tax consequences of IT outsourcing transactions. As practitioners (whether in law firms, accounting firms, or in-house), we must understand the intricacies of these transactions as well as the multistate sales and use tax issues in order to help our client or company (that is, the outsourcing customer) survive the sales and use tax minefield typically associated with these transactions. This advisory serves as a primer on the sales and use tax questions most often encountered in IT outsourcing transactions from the perspective of the customer (the vendor is generally more familiar with the tax questions because it has engaged in these transactions repeatedly). The first section provides an introduction to outsourcing and explains why we care about sales and use tax questions. The second section examines several of the more common sales and use tax questions that arise from IT outsourcing transactions. Finally, the third section provides some practical guidance, particularly regarding sales and use tax questions in the main outsourcing agreement, typically called the master services agreement (MSA).
The advisory is provided in PDF on the Alston & Bird website. Please click here to view the pdf.
