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

"- Poster Joe -" wrote

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.

If in doubt, issue the 1099.

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

-----> real address on hobokeni or hobokenx

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?

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.

"- Poster Joe -" wrote

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.

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.

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

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

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,

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.

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.