1099 - What's a "service" vs a "product"?


P

- Poster Joe -

I'm looking for a pointer to a publication that discusses what
qualifies as "services" that need to be reported on a 1099. I seem to
recall reading some detailed descriptions somewhere in the past but I
can't find them in a random search at the IRS site.

More specifically, if someone wants to comment on the specific service
I am trying to pin down: web site development. My question involves
purchasing a custom web site from another party - is this a purchase
of a product or a service? In this case, the web site developer does
all of the work as a strictly defined independent contractor who meets
with the client, learns about the business, then works independently
to create a custom web site for the client, finally delivering the
completed product (HTML files, graphics, etc) to the client.
 
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P

Paul Thomas, CPA

- Poster Joe - said:
I'm looking for a pointer to a publication that discusses what
qualifies as "services" that need to be reported on a 1099. I seem to
recall reading some detailed descriptions somewhere in the past but I
can't find them in a random search at the IRS site.

More specifically, if someone wants to comment on the specific service
I am trying to pin down: web site development. My question involves
purchasing a custom web site from another party - is this a purchase
of a product or a service? In this case, the web site developer does
all of the work as a strictly defined independent contractor who meets
with the client, learns about the business, then works independently
to create a custom web site for the client, finally delivering the
completed product (HTML files, graphics, etc) to the client.





You would issue a 1099 to them for that work. It's not like you bought a
manufactured web site that's been sitting on someone's shelf since November.
It's also highly likely that you're going to be paying this guy to maintain
it for some time.
 
B

Benjamin Yazersky CPA

I'm looking for a pointer to a publication that discusses what
qualifies as "services" that need to be reported on a 1099. I seem to
recall reading some detailed descriptions somewhere in the past but I
can't find them in a random search at the IRS site.

More specifically, if someone wants to comment on the specific service
I am trying to pin down: web site development. My question involves
purchasing a custom web site from another party - is this a purchase
of a product or a service? In this case, the web site developer does
all of the work as a strictly defined independent contractor who meets
with the client, learns about the business, then works independently
to create a custom web site for the client, finally delivering the
completed product (HTML files, graphics, etc) to the client.

--


If in doubt, issue the 1099.
From your description, I'd say the 1099 should be issued.
And check your state rules, they may want a copy of the 1099.




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P

- Poster Joe -

If in doubt, issue the 1099.

And check your state rules, they may want a copy of the 1099.
Benjamin:

I hear what you guys are saying and I always play it conservative.
But, I know the web guy (close friend) has a bigger issue - none of
his clients send him 1099's. He'd like to nail this properly and not
create an inconsistency. For me, I have a similar issue with another
vendor type of that I need to pin down after this one.

Is there a publication that describes what a "service" is in detail? I
remember reading grimy details of something on-line similar back when
I had a Corp and there was a question of whether I was a PSC or not. I
found an on-line IRS resource - forget where - that had the details
right down to recent letter rulings on the issue. (Turned out "not a
PSC" based on a very fine point I found that was acceptable to my
CPA). But, somewhere out there there was a pub or IRS data store that
had very detailed information on the rules and rulings.

Is there something like that out there for 1099's?
 
A

Allan Martin

- Poster Joe - said:
Benjamin:

I hear what you guys are saying and I always play it conservative.
But, I know the web guy (close friend) has a bigger issue - none of
his clients send him 1099's. He'd like to nail this properly and not
create an inconsistency. For me, I have a similar issue with another
vendor type of that I need to pin down after this one.
The fact that the clients do not send a 1099 is their problem, it is
certainly not your friends problem. This is a non-issue. It is up to the
taxpayer to report his taxable service income. The non-receipt of a 1099(s)
should not factor into the amount reported.
 
P

- Poster Joe -

The fact that the clients do not send a 1099 is their problem, it is
certainly not your friends problem. This is a non-issue. It is up to the
taxpayer to report his taxable service income. The non-receipt of a 1099(s)
should not factor into the amount reported.
All understood.

Still, there must be some place where the IRS has made a specific
ruling on whether a selling (building) a "web site" is a product or
service. At the least, there must be a ruling on whether delivering
custom developed software is a product or service.

I'd just like to see something more specific and definitive. I tried
searching at the IRS site but it's difficult to come up with search
terms that define the search narrowly enough to weed out what I need.
 
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P

Paul Thomas, CPA

- Poster Joe - said:
Still, there must be some place where the IRS has made
a specific ruling on whether a selling (building) a "web
site" is a product or service.


You can search the Private Letter Rulings (PLR). Otherwise head to the
court cases to see what you can find.

Otherwise you can pay for a PLR, spell out your facts, and see where the
chips fall.

It really doesn't matter though, as whatever income is generated is still
taxable. So there's no savings to gain, so why bother spanding for a PLR.






At the least, there must be a ruling on whether delivering
custom developed software is a product or service.

Read what you're saying.......custom built isn't a manufacturing job. It's
a very personal/professional service.

Microsoft manufactures software - it's clearly a product. You buy what they
sell - or you do without.

Your guy builds what you want - or he does without.
 
S

Stuart Bronstein

- Poster Joe - said:
Still, there must be some place where the IRS has made a specific
ruling on whether a selling (building) a "web site" is a product
or service. At the least, there must be a ruling on whether
delivering custom developed software is a product or service.
I've only seen this issue come up in the context of sales tax. And in
those cases it's be dependent on the specific statute.

I did a brief check of tax court and other federal cases, as well as
IRS regulations, and was unable to find anything at all on this point.

Stu
 
A

Allan Martin

- Poster Joe - said:
All understood.

Still, there must be some place where the IRS has made a specific
ruling on whether a selling (building) a "web site" is a product or
service. At the least, there must be a ruling on whether delivering
custom developed software is a product or service.

I'd just like to see something more specific and definitive. I tried
searching at the IRS site but it's difficult to come up with search
terms that define the search narrowly enough to weed out what I need.
Your dilemma is like trying to define pornography, may be impossible but you
know it when you see it. In your case having someone custom design a Web
Site looks like a service.


--
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S

Seth

I've only seen this issue come up in the context of sales tax. And in
those cases it's be dependent on the specific statute.
That is, it varies by state. I suspect the IRS will accept whatever
rules your state has.

It's always safer just to issue the 1099; there's no penalty if it
wasn't required. (For the recipient, assuming he reports all his
income, there's no harm in failing to receive a 1099.)

Seth
 
S

Seth

- Poster Joe - said:
Still, there must be some place where the IRS has made a specific
ruling on whether a selling (building) a "web site" is a product or
service. At the least, there must be a ruling on whether delivering
custom developed software is a product or service.
Who owns the copyright? If it's a Work for Hire where the buyer owns
the copyright, I'd say it's a service. If it's the sale of some bits
with a license, and the creator owns the copyright and is allowed to
re-use parts of it in his next "custom" website, it's a product.

Seth
 
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P

- Poster Joe -

Who owns the copyright? If it's a Work for Hire where the buyer owns
the copyright, I'd say it's a service. If it's the sale of some bits
with a license, and the creator owns the copyright and is allowed to
re-use parts of it in his next "custom" website, it's a product.

Seth
All right boys, thanks for all the insight.

I did a lot of additional digging. It seems that "off the shelf" or
licensed software is definitely a product[note below]. However, the
only inferences I could find on custom software was that it wasn't
included in any of the references to off-the-shelf, although it was
not specifically excluded either - just not specifically included.

The state seemed to specifically include it as a tangible asset, but
then had a specific section in the statute to exclude anything that
was not off-the-shelf from sales tax and noted that they considered it
a personal service for sales tax purposes.

[note] It's interesting that "licensed" software is considered a
product and a sales taxable tangible item, when in fact you don't even
own a physical product - just a permit to use it. Perhaps that's just
a tacit acknowledgement that the "license" of today is merely a scam
by software manufacturers to duck warranty and product liability
issues.

Thanks again,
 
J

jmail7

Who owns the copyright?  If it's a Work for Hire where the buyer owns
the copyright, I'd say it's a service.  If it's the sale of some bits
with a license, and the creator owns the copyright and is allowed to
re-use parts of it in his next "custom" website, it's a product.
All right boys, thanks for all the insight.

I did a lot of additional digging. It seems that "off the shelf" or
licensed software is definitely a product[note below]. However, the
only inferences I could find on custom software was that it wasn't
included in any of the references to off-the-shelf, although it was
not specifically excluded either - just not specifically included.

The state seemed to specifically include it as a tangible asset, but
then had a specific section in the statute to exclude anything that
was not off-the-shelf from sales tax and noted that they considered it
a personal service for sales tax purposes.

[note] It's interesting that "licensed" software is considered a
product and a sales taxable tangible item, when in fact you don't even
own a physical product - just a permit to use it. Perhaps that's just
a tacit acknowledgement that the "license" of today is merely a scam
by software manufacturers to duck warranty and product liability
issues.

Thanks again,

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used,   >>
<< nor can it used, for the purpose of avoiding penalties  >>
<< that may be imposed upon the taxpayer.                  >>
<<                                                         >>
<<   The Charter and the Guidelines for submitting posts   >>
<<  to this newsgroup as well as our anti-spamming policy  >>
<<                  are atwww.asktax.org.                 >>
<<         Copyright (2007) - All rights reserved.         >>
<< ------------------------------------------------------- >>
For a definition of services, see Treas. Reg. § 1.861-18(d).

========================================= MODERATOR'S COMMENT:
When responding please delete all unnecessary parts of the prior post.
 
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B

Barry Margolin

- Poster Joe - said:
Who owns the copyright? If it's a Work for Hire where the buyer owns
the copyright, I'd say it's a service. If it's the sale of some bits
with a license, and the creator owns the copyright and is allowed to
re-use parts of it in his next "custom" website, it's a product.

Seth
All right boys, thanks for all the insight.

I did a lot of additional digging. It seems that "off the shelf" or
licensed software is definitely a product[note below]. However, the
only inferences I could find on custom software was that it wasn't
included in any of the references to off-the-shelf, although it was
not specifically excluded either - just not specifically included.

The state seemed to specifically include it as a tangible asset, but
then had a specific section in the statute to exclude anything that
was not off-the-shelf from sales tax and noted that they considered it
a personal service for sales tax purposes.

[note] It's interesting that "licensed" software is considered a
product and a sales taxable tangible item, when in fact you don't even
own a physical product - just a permit to use it. Perhaps that's just
a tacit acknowledgement that the "license" of today is merely a scam
by software manufacturers to duck warranty and product liability
issues.
I think the big difference is whether the time you spent doing the work
was devoted specifically to the one customer. If you develop software
and then license it to numerous customers, it's a product because you
aren't billing any particular customer for the hours you worked.

That's probably another way to look at it. Even if you don't actually
bill by the hour, if the nature of the relationship is such that you
*could*, it's a service.
 

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