Massachusetts has rapidly expanded its sales tax (and corresponding “use tax”) to reach certain kinds of services rendered to Massachusetts purchasers in connection with computer software. The new law was enacted July 24, 2013 and became effective July 31, 2013. (Mass. Statutes, Acts of 2013, chapter 46, secs. 48 and 49).
The sales tax is a 6.25% tax on the retail sale to Massachusetts purchasers (individuals and businesses) of various kinds of property that are not real estate, and also on the retail sale of a limited variety of services (for example, telecommunications services).
The new law expands the reach of the sales tax (and the corresponding “use tax”) to services of installing standardized software (sometimes called pre-packaged or pre-written software) as well as services modifying, integrating, enhancing or configuring standardized software. The sale of standardized software, by itself, is already subject to sales (or use) tax. Now, paid-for installation of standardized software, as well as services of tinkering with the standardized software to make it fit the purchaser’s needs, appear to be subject to the expanded sales tax.
Until now, the sale of custom designed software has not been subject to sales (or use) tax. However, it appears, under the new law, that if there is custom software that modifies, enables, adapts or enhances standardized software the sale of the custom software will be subject to the expanded tax on services. Also, it appears that purchased services to merely install unmodified standardized software is also now subject to the expanded sales tax on services.
[Meanwhile, and apart from the previous discussion, another provision of the new law also expands the reach of the sales tax to what it calls “computer system design services”, which it defines as “planning, consulting or designing of computer systems to integrate hardware, software or communication technologies….”.]
The Mass. DOR has issued two useful statements about the new law. One is Technical Information Release (TIR) 13-10, issued July 25, 2013; accessible at the hyperlink http://www.mass.gov/dor/businesses/help-and-resources/legal-library/tirs/tirs-by-years/2013-releases/tir-13-10.html . The other DOR statement is “Frequently Asked Questions: The New Computer and Software Services Tax Effective 7/31/13”, accessible at the hyperlink http://www.mass.gov/dor/docs/dor/law-changes/faqss-computer-software-2013.pdf. Interested readers are encouraged to read both.
The reach of the new law may be difficult to fully comprehend, especially initially. However, here are a few observations, mostly drawn from the two DOR statements:
- Purely diagnostic trouble shooting does not appear to be a taxable service (although the correction of the problem may be if additional software is part of the solution). (FAQ Q&A 10)
- Consulting and evaluating existing prepackaged software to evaluate its deficiencies and recommend changes is not a taxable service (TIR 13-10, part II)
- Training for use of hardware or software is not a taxable service (TIR 13-10, part II)
- Website design may, or may not, be a taxable service, depending upon whether the design modifies standardized software or is completely custom. Apparently if the website design is completely customized, then, it would not be a taxable service. (FAQ Q&A 10)
- Installation services for even unmodified standardized software is a taxable service. (FAQ Q&A 7).
- According to the DOR service contracts entered into before the new law’s effective date (before July 31, 2013) are not completely exempted (not completely “grandfathered out”). Rather, the new law applies the sales tax to payments under even pre-7/31/13 contracts, where the payments under the contract are due on or after 7/31/13 and those payments are for services performed on or after 7/31/13. (TIR 13-10, part IV; FAQ Q&A 19)
- Providers of “services” that fall within the new law must either already be registered as “vendors” with the Mass. DOR for purposes, or, if they have not previously registered, they must now register through the DOR’s “WebFile for Business” at the DOR’s website – www.mass.gov/dor . (FAQ Q&A 27).
- Subject to exceptions (for example, documented purchase for resale), purchasers of services who are located in Massachusetts may be responsible for declaring and paying the analogous “use tax” if the vendor does not charge the sales tax. (TIR 13-10, Part III, D, citing Mass. Gen. Laws c. 64I, sec. 7(c)(5)).
- Both the sales tax and the use tax on computer services must be filed and paid on-line through the DOR’s “WebFile for Business”. (TIR 13-10, Part V).
The new law appears to be not only far reaching but, also, endowed with somewhat ambiguous boundaries. It may give rise to uncertainty and discomfort as both service providers and their customers “learn the ropes”.
This Article is intended only to provide generalized information. It is not intended to provide information or advice with respect to specific situations. To address real life, specific situations you should obtain appropriate professional assistance.
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