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Massachusetts Sales and Use Tax Expanded to Certain Computer Services
August 9, 2013
The Massachusetts legislature recently passed legislation broadening the application of the Massachusetts 6.25% sales and use tax to include certain software-related services previously specifically exempt from sales and use taxation. This new legislation was passed under “An Act Relative to Transportation Finance” and requires software vendors to collect the 6.25% sales tax on the software-related services starting on July 31, 2013. However, services provided under contracts entered into before July 31, 2013 are not subject to the expanded sales and use tax unless those services are invoiced after that date and relate to services provided on or after that date. In addition, prepaid hours purchased and paid before July 31, 2013 will not be subject to the sales tax.
The Massachusetts Department of Revenue has published initial guidance on the application of the expanded tax in the form of Technical Information Release 13-10 (“TIR 13-10”). Final rules are expected by October 2013.
Services Subject to the Sales and Use Tax
Prior to July 31, 2013, most services were not subject to sales and use tax in Massachusetts. The Act extends the state sales and use tax to the following:
- Computer System Design Services: Computer system design services provided by a vendor or third party that consist of the planning, consulting or designing of computer systems that ultimately integrate computer hardware, software or communication technologies.
- Software Modification Services: Software modification services provided by a vendor or third party that consist of the modification, integration, enhancement, installation or configuration of standardized software that is licensed or sold or otherwise made available to more than one user.
Based on initial guidance, website design for Massachusetts based customers will be subject to the expanded sales and use tax unless the website designer is creating custom software for its customer as opposed to configuring or modifying Open Source code or other prewritten software. In addition, many vendors are surprised to learn that sales of cloud-based services (SaaS) are treated as sales of access to prewritten software on the seller’s or a third party’s server. These services are taxable under both the prior and expanded law.
Examples of services that are NOT subject to the expanded sales and use tax include the following:
- Consulting and evaluation services for existing computer systems to identify deficiencies and needs.
- Training services with respect to modified software.
- Telephone support services.
- Services related to the development of custom computer software NOT based on prewritten software.
- Website hosting, data storage and disaster recovery services.
- Services related to data conversion and data migration performed during a computer software. implementation project if separately stated and invoiced.
- Data processing services.
- Repair or maintenance services involving inconsequential configuration of existing software.
- Reinstallation of customer’s software on new hardware.
Service Providers Obligated to Collect the Sales and Use Tax
Sales of services covered by the newly-expanded sales and use tax are subject to the tax only if they are “sourced” to a purchaser of the services in Massachusetts. TIR 13-10 sets forth a specific list of rules for determining where a service will be considered sourced for purposes of imposing the tax. These are applied in the order of priority listed below:
1. If the purchaser receives the service at a business location of the service provider, the service is sourced to that business location of the service provider.
2. If the service provider knows the location where the service is received by the purchaser based on instructions for delivery as provided by the purchaser, the service is sourced to that location, when use of this address does not constitute bad faith.
3. If the purchaser does not specify a location for the service to be delivered, the service is sourced based on the purchaser’s address that is known to the service provider as provided by the purchaser or based on information known to the service provider. For this purpose, address information from a payment instrument or credit card is acceptable, when use of this address does not constitute bad faith.
4. If neither the delivery location nor the purchaser’s address can be determined, then the service is sourced based on the address of the service provider from which the sale was made.
If the computer system or modified software purchased will be used by the purchaser in more than one state, the service provider may avoid having to collect sales tax if the purchaser provides the service provider with a Multiple Points of Use Certificate (“MPU Certificate”).
The lack of clarity surrounding the expansion of the Massachusetts sales and use tax to computer design and software-related services makes it difficult to interpret and comply with the law in practice. The most obvious practical advice is for providers of such services to separately state and describe each service when invoicing purchasers of computer design and software-related services. For example, services attributable to evaluation, training, data processing and data conversion/migration (non-taxable) should be clearly separate and distinguishable from those attributable to system design and integration and the installation, enhancement, modification and configuration of prewritten or standardized software (taxable).
Client Advisory is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2013 Posternak Blankstein & Lund LLP. All rights reserved.