Category: Administrative & Regulatory

Google Must Face Most Claims in Keyword Wiretap Class Action

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If you were on Google’s home page yesterday at the office, you probably spent more time than you care to admit playing the “help the letter ‘g’ hit the piñata” game that Google created for its 15th birthday.

For Google, that might be a welcome distraction from very bad news it received from the Northern District of California.  U.S. District Court Judge Lucy Koh denied in part Google’s motion to dismiss a 2010 claim in which users accuse Google of violating various state and federal laws by scanning the content of user emails for purposes of creating user profiles and directing targeted advertising, thus allowing a putative class action suit against the search (and everything else online) giant to proceed.

Judge Koh’s order (full text can be found here), is significant in its handling of a number of Google’s arguments, but the rejection of a particular line of argument is understandably receiving much of the attention. In its Motion to Dismiss, Google argued that its practice of scanning emails is not a violation of the Federal Wiretap Act because, among other reasons, Gmail users and non-Gmail users have consented to the interception of emails.   Google’s consent argument was two-fold.  First, it argued that Gmail users had “expressly consented” to having their emails scanned by agreeing to its Terms of Service and Privacy Policies, which every Gmail users is required to do.  Second, it argued that non-Gmail users have “impliedly consented” to the practice by sending an email to a Gmail user, because at that time those non-users understood how Gmail services operate.

Judge Koh rejected both of Google’s consent arguments, holding that the Court “cannot conclude that any party – Gmail users or non-Gmail users – has consented to Google’s reading of email for the purposes of creating user profiles or providing targeted advertising.”  The Court dug into the multiple iterations of Google’s Terms of Service and Privacy Policies that have been in place since 2007, and found that the policies did not explicitly notify users that Google would intercept emails for the purposes or creating user profiles and targeting advertisements.  The Court discussed a number of sections of Google’s policies where users allegedly consented to the practice of scanning emails for advertising purposes, and in each case found that the policies either described a different purpose for scanning emails (such as filtering out objectionable content) or were unclear when describing what kind of information would be intercepted (using descriptions like “information stored on the Services” or “information you provide”).  The Court further held that Google’s current policies (which were put in place on March 1, 2012) are equally ineffective at establishing consent.  Finally, the Court rejected the argument that non-Gmail users had impliedly consented to the interception of emails, noting that accepting Google’s theory of implied consent would “eviscerate” laws prohibiting interception of communications.

Judge Koh’s denial of Google’s Motion to Dismiss is the latest reminder that when it comes to privacy policies and terms of use, how you write something can be as important as what you write.  We will have more on the various issues discussed in Judge Koh’s order over the next few days.

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Diagnostic Laboratories Settles for $17.5 Million After Healthcare Whistleblowers’ Allegations of Medicare Fraud

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The Department of Justice announced yesterday that Diagnostic Laboratories and Radiology, the West Coast’s largest supplier of laboratory and X-ray services to nursing homes, will pay $17.5 million to settle whistleblower allegations that the California-based company violated the False Claims Act by giving kickbacks for referral of mobile lab and radiology services, which were subsequently billed to Medicare and Medi-Cal (California’s Medicaid program).  Diagnostic Labs allegedly took advantage of Medicare’s and Medi-Cal’s reimbursement systems by billing them at standard rates while secretly giving discounted fees to the participating nursing homes. According to the lawsuit, those fees were as much as 80 percent below the lab’s normal rates.

For inpatients, Medicare pays a fixed rate based on the patient’s diagnosis, regardless of specific services provided.  For outpatients, Medicare pays for each service separately.  Diagnostic Labs’ scheme supposedly enabled the nursing homes to maximize their profits for providing inpatient services by decreasing the cost of them.  It also allegedly allowed Diagnostic Labs to obtain a steady stream of lucrative, outpatient referrals that it could directly bill to Medicare and Medi-Cal.  This provision of inducements, including giving discounted rates to generate referrals, is prohibited by both federal and state law. By law, the discounts should have been passed along to the government programs.

The Medicare whistleblowers in this case were two former Diagnostic Lab employees, Jon Pasqua and Jeff Hauser, who said they were fired after reporting the secret discounts and kickbacks to the authorities. Hauser and Pasqua worked in the company’s sales office and said they tried to report the questionable discount practices to supervisors first, but were ignored. They then provided information to state and federal officials, and were subsequently fired from their jobs shortly before filing the healthcare fraud case in February 2010, according to their lawyers.

This settlement will resolve Hauser and Pasqua’s lawsuit, which was filed under the qui tam, or whistleblower, provisions of the federal and state False Claims Act. This act allows private citizens with knowledge of fraud to bring qui tam lawsuits on behalf of the US government. The individual filing the lawsuit is known as the relator, or whistleblower.  Healthcare whistleblowers, such as Hauser and Pasqua, serve an important role in exposing and eliminating healthcare fraud.

While it is true that whistleblowers take on a personal risk in these cases, it is still worthwhile for them to come forward with their information. Because qui tam whistleblowers help to eliminate government fraud, they receive a significant proportion of the lawsuit’s settlement for their efforts.

Together, Pasqua and Hauser will receive a total $3,755,500 as their share of the federal government’s recovery.

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Health Care Exchange Notices Required by October 1, 2013; However No Penalty for Not Providing

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The Affordable Care Act requires that employers provide employees with notice (Notice) about the health care exchanges (the federal government also refers to these as “marketplaces”). Nevertheless, some confusion prevails about what is actually required.

Employers Subject to the Notice Requirement

The Notice must be provided by all employers to which the Fair Labor Standards Act (FLSA) applies. In general, the FLSA applies to employers that have one or more employees who are engaged in, or produce goods for, interstate commerce. For most companies, a test of not less than $500,000 in annual dollar volume of business applies. However, the FLSA also specifically covers the following entities: hospitals; institutions primarily engaged in care of the sick, aged, mentally ill, or disabled who reside on the premises; schools for children who are mentally or physically disabled or gifted; preschools, elementary, and secondary schools and institutions of higher education; and federal, state and local government agencies. In addition, the FLSA will apply where an employee is engaged in interstate commerce, even if the activities do not rise to the requisite volume of business. Consequently, nearly all employers will be subject to the FLSA and, therefore, the Notice requirement.

Those who must receive the Notice are all employees of the employer, regardless of whether the employee is even eligible for the employer’s health plan.

When Must the Notice Be Provided?

The Notice must be given to all current employees by October 1, 2013. Individuals who begin employment after October 1, 2013 must be given the Notice within 14 days of their hire date. The Notice can be distributed to employees by first class mail or electronically, provided that the employer can meet Employee Retirement Income Security Act’s (ERISA) requirement for distribution of electronic notices (generally, this means that the employee has either consented to the electronic notice or utilizes a company computer as an essential function of their job).

What the Notice Must Include

Pursuant to the statute, the Notice must inform the employee of the existence of the health care exchange, describe the services the exchange provides, and how the employee can contact the exchange. In addition, the Notice must advise the employee that he or she may be eligible for a premium tax credit if the total allowed costs of benefits provided under the employer’s plan is less than 60 percent of such costs, that an employee who purchases exchange coverage may lose the employer’s contribution toward the cost of coverage and that the employee’s payment for exchange coverage will be on an after-tax basis.

The Department of Labor (DOL) has provided a model Notice for employers who offer health insurance and one for employers who do not offer health insurance to employees. The model Notices can be found here. Both model Notices go beyond the scope of the information an employer is required to disclose pursuant to the Affordable Care Act.

Employees Seeking Exchange Coverage Will Need Employer Information

Starting in early October when the insurance exchanges are supposed to “turn on,” employees seeking information about exchange coverage will need information about any coverage the employer offers. Employers are obligated by law to engage in that discussion and provide information. For example, a low income employee who is offered coverage by his employer may still be interested in seeing if alternative coverage is available from the insurance exchange that, when subsidized by tax credits, may be a better choice for the employee.

The model Notice for employers that offer coverage contains a Part B with boxes for the employer to check and lines to complete in which information about the employer’s plan is provided. Still further information can be provided on an optional page. Depending upon the employer’s circumstances, we have recommended edits to ease the administrative burden, to limit confusion by employees, to increase accuracy based on the employer’s own circumstances, and other changes.

No Fine for Failing to Provide Exchange Notices

On September 11, 2013, the DOL announced it will not impose a penalty on employers who do not distribute the Notice. Nevertheless, we recommend that Notice be given. The media has publicized this obligation such that employees who expect to receive the Notice but do not, may inquire or complain. Furthermore, while no penalty is currently imposed, the Notice is “required” and future guidance is likely to presume it has been given. It is also possible that future guidance will be issued that does impose the penalty for future failures to provide it. We believe the better approach in most situations is to provide the Notice, modifying it if necessary based on the employer’s own circumstances.

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US Taxpayers with Canadian Registered Retirement Savings Accounts (RRSPs)? File now to avoid penalties!

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This blog post focuses on the rules around US citizens or tax residents who have Canadian Registered Retirement Savings Accounts (RRSPs). RRSPs are a government sanctioned savings program in which contributions are deducted from taxable income, and any investment growth is deferred from taxation until the owner of the account makes withdrawals. This is a fantastic program for Canadian residents, as it provides significant tax savings in the short term, while allowing pre-tax retirement accounts to grow for use in a later year when income (and thus marginal tax rates) are expected to be lower.

However, there is a complication for US citizens resident in Canada, who are subject to both Canadian and US tax rules. Many assume that because the growth in an RRSP account is sheltered from tax in Canada, it need not be reported and taxed in a US tax return either. Unfortunately, this is not necessarily the case. In fact, the default treatment of RRSP accounts under US tax law is no different than a non-registered investment account – interest, dividends or gains on invested funds are reportable in the Form 1040 tax return, with no deduction for contributions in a given year.

However, there is relief available under Article XVIII(7) of the Canada-US Tax Treaty. Since 2002, US income tax residents have been able to make an election to defer US tax on the growth within an RRSP. The election is made by filing Form 8891 with a timely filed income tax return. Of course, the IRS will not permit a deduction for RRSP contributions; even so, Canada’s generally higher income tax rates usually mean that no US income tax is payable on the difference in taxable income, after foreign tax credits are applied. And, it is important to recall that RRSP accounts must be disclosed on FBAR returns annually.

This Treaty election is certainly helpful, but what should be done for those just hearing about their US tax obligations? The difficulty is that Form 8891 must be filed with a Form 1040 income tax return, so coming into compliance after the fact will not necessarily be effective. However, a trio of recent Private Letter Rulings (PLRs) from the IRS does provide some comfort regarding the IRS’ view on this issue.

As background, PLRs are written memoranda released by the IRS in response to specific enquiries by taxpayers regarding their tax situations (all personal information is redacted prior to public release on the IRS website). While these rulings are completely fact-specific, and cannot be used as legal precedents in any future cases, the IRS reasoning and interpretation of the rules can be instructive.

On September 12, 2013, three PLRs were released in which the IRS granted an extension to taxpayers in order to file appropriate Form 8891 Treaty Elections without penalty or interest accruing. In each case, the taxpayer was seeking discretionary relief from the IRS to permit late filings of Form 8891 in respect of their RRSP accounts in Canada. In each case, the extension was granted.

While each case was ostensibly decided on its own facts, a few common elements from all three cases are worth noting. First, in each case the taxpayer was otherwise tax compliant. This may be a relevant factor in terms of how the IRS would view late-filed Form 8891 – if the tax returns were timely filed at first instance, amended returns attaching the Treaty election form may be less likely to attract attention.

More significantly, however, in each case the IRS made a point of noting that the taxpayers promptly took action upon learning about the need to file Form 8891. The taxpayers did not wait until the IRS sent letters or notices of deficiency regarding the RRSP income.

The regulation that permits the IRS to grant extensions (i.e. Treasury Regulation § 301.9100-3(a)) requires that the taxpayer must satisfy the Commissioner that she acted reasonably and in good faith, and that the grant of relief will not prejudice the interests of the US government.

This factor should serve as fair warning to anyone in this position who is still trying to decide how to deal with their US tax compliance issues. While it may be the simplest and cheapest option, leaving your head in the sand is unlikely to earn any sympathy from the IRS if and when your delinquency does come to their attention. Instead, acknowledging an honest mistake and taking action to come into compliance will help to build a set of facts that will permit the IRS to grant some leniency toward your situation.

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Office of Federal Contract Compliance Programs (OFCCP) New Rules Target Veterans and Individuals with Disabilities

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Familiar with this?  It’s time to update your affirmative action plans.  For the women and minorities plan, you gather your applicant data, prepare spreadsheets and update your written materials to reflect new goals and changes in your recruiting sources.  For the veterans and individuals with disabilities plan, you update a bit and you’re done.  Starting early next year, however, the rules will change making updates more onerous for employers.  On August 27, 2013, the Office of Federal Contract Compliance Programs announced final rules for federal contractors regarding hiring and employment of disabled individuals and protected veterans and imposing new data retention and affirmative action obligations on contractors.  The rules are expected to be published in the Federal Register shortly and will become effective 180 days later.

The key changes include:

  • Benchmarks.  Contractors must establish benchmarks, using one of two methods approved by the OFCCP, to measure progress in hiring veterans.  Likewise, contractors must strive to hire individuals with disabilities to comprise at least seven percent of employees in each job group.  The OFCCP says these are meant to be aspirational, and are not designed to be quotas.
  • Data Analysis and Retention.  Contractors must document and update annually several quantitative comparisons for the number of veterans who apply for jobs and the number of veterans that they hire.  Likewise, for individuals with disabilities, contractors are required to conduct analyses of disabled applicants and those hired.  Such data must be retained for three years.
  • Invitation to Self-Identify.  Contractors must invite applicants to self-identify as protected veterans and as an individual with a disability at both the pre-offer and post-offer phases of the application process, using language to be provided by the OFCCP.  This particular requirement worries employers who know that the less demographic information they have about applicants, the better – especially when the application is denied.  Contractors must also invite their employees to self-identify as individuals with a disability every five years, using language to be provided by the OFCCP.

Additional information, including with respect new requirements such as incorporating the equal opportunity clause into contracts, job listings, and records access, can be found here (http://www.dol.gov/ofccp/regs/compliance/vevraa.htm) and here (http://www.dol.gov/ofccp/regs/compliance/section503.htm).

Contractors with an Affirmative Action Plan already in place on the effective date of the regulations will have additional time, until they create their next plans, to bring their plan into compliance.  However, whether they have a current Affirmative Action Plan or not, federal contractors should begin looking at these new rules now and take steps to ensure they are in compliance.

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The IRS/Treasury Department Announcement & Estate Planning Ruling Re: Same-Sex Marriage

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On August 29, 2013, the Treasury Department and the Internal Revenue Service (“IRS“) issued Revenue Ruling 2013-17. The ruling establishes that the IRS will recognize same-sex marriages for all federal tax purposes regardless of where the couple lives, as long as the couple was married in a jurisdiction that recognizes such marriages. So, for example, if a couple was married in Connecticut (a recognizing state), but now live in Kentucky (a non-recognizing state), they will receive the same federal tax treatment as heterosexual couples residing in Kentucky. The ruling clarifies that a “state of celebration” approach will be used versus a “state of residence” rule. Treasury Secretary Jacob J. Lew says the decision “[a]ssures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.” It is important to note that, according to the ruling, “marriage” does not include a registered domestic partnership, civil union or other similar arrangement. The ruling applies to all federal tax provisions where marriage is a factor, including: filing status, estate tax exemptions, personal and dependency exemptions, the standard marriage deduction, IRA contributions, earned income tax credits and employee benefits.

The ruling came on the heels of the Supreme Court’s June 2013 decision in United States v. Windsor and is meant to address some of the confusion that Windsor left in its wake. As background, before Congress enacted the Defense of Marriage Act (“DOMA“), marital status for federal income tax purposes was defined by state law. Section 3 of DOMA banned same-sex couples from being recognized as “spouses” for all federal law purposes. Windsor ruled Section 3 of DOMA unconstitutional; however, the decision did not require states to recognize same-sex marriages. Thus, since June, state and federal agencies have been wondering how to deal with same-sex marriages in non-recognizing states. With the Revenue Ruling, much-needed guidance has arrived.

From the estate planning perspective, there are now several more options that same-sex couples can use to their advantage. First, same-sex spouses are now eligible for the marital deduction, which means that they may transfer as much as they want to their spouse (in life and in death) without incurring federal estate or gift tax, provided that the recipient spouse is a U.S. citizen.

Another benefit is the use of “gift-splitting.” Any individual can give up to $14,000 each year to as many people as they choose without incurring gift tax. Heterosexual spouses, and now same-sex spouses, can combine their $14,000 to jointly give $28,000 to individuals tax-free.

Same-sex spouses will also now get to take advantage of an estate planning tool known as “portability.” Portability allows a widow or widower to use any unused estate tax exclusions (capped at $5.25 million for 2013) of their spouse who died in addition to their own. The unused exclusion must be transferred to the surviving spouse and an estate tax return must be filed (by the executor) within nine months of the spouse’s death, even if no tax is due.

The ruling also has a myriad of other implications for taxes and employee benefits that should be carefully considered by same-sex couples. There are still lingering questions about how other agencies, such as the Social Security Administration, will address benefits post-Windsor.

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It’s Time to Register for the 2015 Diversity Immigrant Visa Lottery!

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On October 1, 2013, the U.S. Department of State will begin accepting requests to register for the 2015 Diversity Immigrant Visa Program (DV-2015), also known as the Green Card Lottery. The Diversity Lottery Program provides a path for foreign nationals to become permanent residents of the United States regardless of whether they have a family member or an employer willing to sponsor them. This program is a success, facilitating the immigration of people from across the globe. If you meet the eligibility requirements and wish to secure permanent residence status in the United States, you should consider registration in the lottery.

Registration begins October 1, 2013

The State Department will open online registration for the DV 2015 Program on Tuesday, October 1, 2013 at 12:00 noon, Eastern Daylight Time (EDT) (GMT-4), and conclude on Saturday, November 2, 2013 at 12:00 noon, Eastern Daylight Time (EDT) (GMT-4). Individuals who meet the eligibility requirements and submit an application during the appointed time will be entered into a lottery from which 55‚000 green card entries will be selected. Applications must be submitted electronically by 12:00 noon EST on Saturday‚ November 2‚ 2013. Detailed instructions are athttp://travel.state.gov/pdf/DV_2015_Instructions.pdf. There is no fee to register for consideration in the lottery. Entries may not be submitted through the U.S. Postal Service.

Am I eligible for a green card if I am selected in the lottery?

Selection in the lottery does not guarantee the applicant a green card; applicants must still meet all standards for admissibility and be able to process their green cards within the allotted time. Immediate family members of successful lottery applicants are eligible for green cards as well, provided they meet the same admissibility standards. Individuals who are selected and eligible for one of the 55,000 visa numbers may either secure an immigrant visa at a U.S. Embassy or Consulate or, if they are in the United States and qualified to do so, adjust their status by filing an application and supporting documentation with United States Citizenship and Immigration Services (USCIS).

What countries are eligible?

Lottery visas are apportioned to foreign nationals hailing from the following six geographic regions: Africa; Asia; Europe; North America; Oceania; and South America‚ Central America, and the Caribbean. To qualify‚ a foreign national must claim nativity or country of birth in an eligible country and meet certain education or work experience requirements. The purpose of the program is to diversify and encourage immigration from countries that send lower numbers of immigrants to the United States.

Not all countries in the six eligible regions fall within the Green Card Lottery program. Because each of the following countries has sent more than 50‚000 immigrants to the United States in the past five years, natives of these countries will not be eligible for the DV 2015 Lottery: Bangladesh, Brazil, Canada, China (mainland-born), Colombia, Dominican Republic, Ecuador, El Salvador, Haiti, India, Jamaica, Mexico, Nigeria, Pakistan, Peru, Philippines, South Korea, United Kingdom (except Northern Ireland) and its dependent territories, and Vietnam.

For the coming year, Nigeria was added to this list of countries ineligible for the lottery.

How do I know if I was selected in the lottery?

Official notifications of selection will be made through Entrant Status Check, available starting May 1, 2014, through at least June 30, 2015, on the E-DV website: www.dvlottery.state.gov. Please note that the Department of State does not send selectee notifications or letters by regular postal mail or by e-mail. Any e-mail notification or mailed letter stating that you have been selected to receive a DV does not come from the Department of State and is not legitimate. Any e-mail communication you receive from the Department of State will direct you to review Entrant Status Check for new information about your application.

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Lawsuits Against Creditors of NewPage

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The trustee for the litigation trust resulting from the NewPage Corporation bankruptcy has launched nearly 800 lawsuits against pre-bankruptcy creditors of NewPage Corporation seeking payment to the trust.

The lawsuits (also called adversary proceedings) have been filed in Delaware bankruptcy court by litigation trustee Pirinate Consulting Group LLC to recover allegedly preferential payments made in the months prior to the company’s Chapter 11 bankruptcy filing in September, 2011.

Much to the surprise of many who did business with the debtor prior to the bankruptcy filing, not only are they waiting for payment on amounts owed, but they will now face claims that they must give back monies previously received.

Defendants should know there are often defenses to these claims, including that the allegedly preferential payments were made in the ordinary course of business or that additional goods were shipped after those allegedly preferential payments were received. Upon receipt of a complaint, defendants should contact counsel knowledgeable about bankruptcy avoidance actions for assistance. Failure to respond to the adversary proceeding complaint in a timely manner, can result in a judgment and collection efforts by the litigation trustee.

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Who’s GINA and What Should I Know About Her? Re: Genetic Information Nondiscrimination Act

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GINA is not a who, but rather a what. The Genetic Information Nondiscrimination Act (“GINA”) was passed by Congress in 2008. GINA makes it illegal for employers with 15 or more employees to discriminate against employees or applicants on the basis of genetic information. Employers cannot lawfully inquire about (1) an individual’s genetic tests; (2) the genetic tests of an individual’s family members; or, (3) the manifestation of a disease or disorder in the family members of such an individual.

At the end of 2012, the Equal Employment Opportunity Commission (“EEOC”) announced in its Strategic Enforcement Plan that genetic discrimination would be a top priority over the next four years. The EEOC stuck to their word – in May, 2013, the EEOC settled its first lawsuit alleging GINA violations. The suit involved a fabrics distributor, Fabricut, Inc., who allegedly violated the Act by asking a woman for her family medical history in a post-offer medical examination. The company refused to hire the applicant after assessing that she had carpal tunnel syndrome, which led to Americans with Disabilities Act violations as well. The suit was settled for $50,000.

Shortly thereafter, the EEOC filed its second suit against The Founders Pavilion, Inc., a nursing and rehabilitation center. According to the EEOC suit, Founders conducted post-offer medical exams of applicants, which were repeated annually if the person was hired. As part of this exam, Founders requested family medical history, which is a form of information prohibited by GINA.

Employers should ensure that their policies related to employee medical information and any conducted medical exams comply with GINA. In addition, it would be wise for employers to update employee handbooks to state that discrimination on the basis of genetic information is prohibited.

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A Tech Industry-Friendly Stance On Cloud Computing Tax

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In a pleasant surprise, the New Jersey Division of Taxation recently issued guidance announcing that sales tax is not due on most cloud computing services. New Jersey’s position is contrary to a growing national trend in which many states have taken the position that cloud computing is subject to sales tax as the sale of software.

New Jersey demonstrates a pro-information technology industry position. It also comes at the same time that Massachusetts, traditionally an extremely technology-friendly state, appears to have changed its policy direction on taxation of information technology services.

New Jersey Technical Bulletin 72 addresses three types of cloud computing services:

software as a service (SaaS), which offers the use of software on a per transaction basis, through a service contract or by a subscription;

platform as a service (PaaS), which provides access to computing platforms; and

infrastructure as a service (IaaS), which provides hardware, software and other equipment and services necessary to support and manage the content and dataflow of its customers.

The technical bulletin says that software as a service is not subject to New Jersey sales tax as the sale of software because it is not delivered in tangible form, it is not downloaded onto the customer’s computer and title to the software is not transferred to the customer.

However, the bulletin does say that certain types of SaaS may be subject to sales tax as a taxable information service. A taxable information service is defined as:

The furnishing of information of any kind, which has been collected, compiled or analyzed by the seller and provided through any means or method, other than personal or individual information which is not incorporated into reports furnished to other people.

The bulletin then cites examples of taxable information services such as Westlaw, LexisNexis, Commerce Clearing House (CCH) and Rich Internet Application (RIA). But it would appear that most other classes of

SaaS that do not involve compiling or analyzing information should not fall into the taxable information service category. This is a fact-based determination, which would require analysis on a case-by-case basis.

The bulletin states that platform as a service and infrastructure as a service would not be subject to sales tax because they do not represent the sale of tangible personal property, but merely access to the software. The bulletin states that IaaS arrangements that show billing for the rental of hardware (e.g., servers) are not taxable because the customer does not have title or possession of the equipment.

Finally, the bulletin says that web hosting and data hosting services are not subject to New Jersey sales tax.

The position taken by the New Jersey Division of Taxation is quite favorable to providers and customers of cloud computing services, as other states have been taking the opposite approach, saying that many of these services are taxable, including states such as New York, Pennsylvania and Vermont.

Companies that provide cloud-based computing services should determine the states in which they might have a sales tax collection obligation, and whether the services they provide are subject to that state’s sales tax.

To see the full text of this new technical bulletin, please follow this link and click on TB-72.

This pro-IT industry move is in contrast to a new Massachusetts law that went into effect on July 31, just a few weeks after the bill being passed by its Legislature. This new Massachusetts law signals a sea change in the Bay State’s pro-technology industry policy.

Massachusetts now imposes sales tax on most software and hardware design, installation and integration services, including the modification, integration, enhancement, installation and configuration of prewritten software.

So, this new tax will include amounts paid in order to customize any prewritten software for the needs of the customer, including macros and plug-ins that operate in conjunction with the software (although there are exemptions for modifications to free open source software, and software that operates industrial machinery).

This expansion of the Massachusetts sales tax will cast a wide net that will tax hardware and software consulting services that have not been taxable in the past, from the biggest, most sophisticated software consulting firms that manage the integration of software for large corporations, down to the high school student who helps non-tech savvy baby boomers set up their home computer for $20 an hour.

This apparent new direction taken by Massachusetts is a huge contrast to the position staked out by the state’s then-Gov. Paul Cellucci in the early years of the Internet boom, when the debate on the taxation of e-commerce sales was just beginning.

A bill had been introduced in Congress to exempt all e-commerce sales from state taxation. Cellucci was quoted in the Feb. 4, 2000, edition of State Tax Notes as being in favor of the measure because it would be bad tax policy to tax the emerging Internet industry:

Arguing that ‘the rapid growth of high-tech in the past five years’ has created 450,000 new jobs in his state, Cellucci said the taxation of remote and electronic commerce is ‘not just a real threat to the economy of Massachusetts, but for the nation as a whole. Unlike traditional brick-and-mortar businesses, e-commerce ventures are extremely portable, and could easily move their headquarters to an offshore island where they would be immune from any sales tax from this country. (Tax Analysts Document Number: Doc 2000-3441.)

The new Massachusetts law indicates a reversal of the state’s earlier pro-industry policy, while New Jersey, which in prior years has taken an aggressive tax approach to IT taxation, has apparently also reversed course, but in the opposite positive direction.

It is possible that Massachusetts has grown complacent, assuming that its enormous stockpile of human innovation capital will stay put, while New Jersey appears to be recognizing the value of cultivating the IT industry in the Garden State. Time will tell if these shifts in policy toward the IT industry will result in any measurable migration.

This article was previously published by Law360.

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