Massachusetts Prepares to Tax Computer Services
- Jul 29, 2013 | Gail Cole
Massachusetts is on track to tax certain computer and software services. Pursuant to An Act Relative to Transportation Finance, (the Act), which became law on July 24, the new sales and use tax changes will take effect on July 31, 2013.
A Technical Information Release (TIR) issued by the Massachusetts Department of Revenue addresses the upcoming changes to the sales and use tax law. The TIR "provides initial guidance regarding these statutory changes, the applicable sourcing rules, transition rules for existing contracts, electronic filing requirements, calculation of use tax liability, and the effective date and its impact on filings and payments."
What it does
The Act extends and amends the definition of "[c]omputer system design services" found in Chapter 64H of the General Laws of Massachusetts. Chapter 64H deals with the application of sales and use tax to "Computer Industry Services and Products."
“’Computer system design services’ are defined in the Act as "the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party.”
As amended by the Act, the definition of "services" now includes: "computer design services and the modification, integration, enhancement, installation or configuration of standardized software."
Massachusetts law makes it clear that these services are taxable. It reads: "Nothing herein shall exempt from tax sales of tangible personal property subject to tax under this chapter."
What it means
Beginning July 31, 2013, vendors of Computer/Software Services will be required to collect Massachusetts sales/use tax from purchasers. If the purchaser provides the vendor with an MPU (Multiple Points of Use) certificate, the vendor is not obligated to collect sales or use tax.
In the event that sales tax is not collected by the vendor and the purchaser does not provide a valid MPU certificate, the purchaser must pay Massachusetts use tax on the purchase. Sales tax may not be collected for several reasons, including but not limited to the following:
- The sale of the services is not sourced to the purchaser in Massachusetts;
- The vendor is a remote seller and not required to collect Massachusetts sales tax; or
- The vendor erroneously fails to collect sales/use tax as required.
For sourcing purposes, vendors must collect and remit Massachusetts sales tax by applying the rules "set forth below in the order of priority listed, as applicable…:"
- "If the purchaser receives the service at a business location of the vendor, the retail sale is sourced to that business location of the vendor.
- If the vendor knows the location where the service is received by the purchaser based on instructions for delivery as provided by the purchaser, tax is due based on that location, when use of this address does not constitute bad faith.
- If the purchaser does not specify a location for the service to be delivered, the vendor must collect tax based on the purchaser’s address that is known to the vendor as provided by the purchaser or based on information known to the vendor (e.g., as collected to complete the sale), such as address information from a payment instrument or credit card, when use of this address does not constitute bad faith.
- If neither the delivery location nor the purchaser’s address can be determined, then the vendor must collect tax based on the address of the vendor from which the sale was made."
Only services directly involved with "computer system design services or software modification services…directly related to a particular systems integration project involving the sale of computer hardware or software" are to be subject to sales and use tax.
Non-taxable services include:
- "Consulting and evaluation services with respect to existing computer systems to identify deficiencies and needs," and
- "Services to prepare a business to use modified software, such as training."
The Fine Print
Anyone who sells to Computer/Software Services to purchasers residing in Massachusetts, and anyone residing in Massachusetts who purchases such services, should take the time to read the fine print. Did you know, for example, that when Computer/Software Services are purchased "for use by two or more members of an affiliated group of corporations or other commonly controlled entities engaged in the same general line of business… the Commissioner may require any of the group members benefiting from the use of the services in Massachusetts to report the use tax on such purchase on an appropriately apportioned basis."
It takes time to read the fine print and to accurately understand how new laws pertain to sales tax and your industry. You could spend the necessary time and resources, or you could automate sales tax and let someone else do the work for you.
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