Massachusetts’ New Software Services Sales Tax

Last week the Massachusetts legislature passed a bill over Governor Deval Patrick’s veto that levies a 6.25% sales tax on certain software-related services; the tax went into effect this week on July 31.

In particular, the law levies a tax on software-related services that involve:

– the planning, consulting, or designing of computer systems that integrate computer hardware, software, or communications technologies provided by a third party vendor (“computer system design services”); and
– the modification, integration, enhancement, installation, or configuration of standardized software (“software modification services”, or services that modify, enable, or adapt prewritten software to meet a purchaser’s business or technical requirements or to operate on the purchaser’s computer systems)

The determining factor for eligibility for the tax is not how the service is described or billed, but what it actually does.

The tax apparently does not apply to personal or professional services “that do not themselves constitute computer system design services or software modification services, and are not directly related to a particular systems integration project involving the sale of computer hardware or software”, such as consulting and evaluation services of existing computer systems to identify deficiencies and needs (although it appears to be very easy to fall into the “computer system design services” definition if a consultant points out the needs of a client), or training services to prepare a business to use modified software

A vendor of applicable software-related services must collect tax from the purchaser “if the sale is sources to the purchaser in Massachusetts”, which is determined by the following rules (in order of priority):

1) 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 (which, if it is in Massachusetts, means tax must be collected)
2) If the vender knows the location where the services are received based on instructions as provided by the purchaser, the sale is sourced to that location, if use of the address does not constitute bad faith (e.g., if the software is delivered to the purchaser’s location in Massachusetts, tax must be collected)
3) If the purchaser does not specify a location for delivery, then the sale is sourced to the purchaser’s address either as provided by the purchaser to the vendor or based on information known to the vendor (like the billing address on the purchaser’s credit card)
4) If neither the delivery location nor the purchaser’s address can be determined, then the sale is sourced to the address of the vendor from which the sale was made.

Furthermore, a vendor is relieved from collecting tax if the purchaser intends to use the product in more than one state, and gives the vendor a Multiple Points of Use Certificate (Form ST-12). Instead, the purchaser is required to pay the appropriate portion of the tax to Massachusetts based on the use in the Commonwealth.

In any event, a purchaser must pay tax on the portion of the services used in Massachusetts if the vendor is not required to collect such tax (e.g. the vendor is given a Multiple Points of Use Certificate, the sale is not sourced to Massachusetts, or is a remote seller), or if the vendor fails to collect the required sales tax.

Contracts entered into before the effective date of the tax are subject to it to the extent that work is performed after July 31, or payment is due, billed, or invoiced after July 31.

The size of the work, of the purchaser, or of the vendor is irrelevant; there are likely plenty of startups and small businesses in Massachusetts and the New England region whose work will be subject to the tax. Any company whose work might fall under the tax’s definitions should consult with their tax advisor to see if they will be required to collect the tax.

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