July 31, 2013
Massachusetts Enacts Changes in Sales and Use Taxes on Computer System Designs Effective July 31, 2013
The MA sales and use tax statute has been amended to implement a new tax on "Computer system design services". The DOR issued Technical Information Release 13-10 on July 25, 2013 to address this statutory amendment.
The MA sales tax now applies to modification, integration, enhancement, installation, or configuration of standardized software, collectively referred to as “software modification services”. The statute intends to tax software services that modify, enable, or adapt prewritten software to meet the business or technical requirements of a particular purchaser and operate on the purchaser’s computer systems, regardless of how those services are described or billed to the customer. These taxable services may also be described as customization services.
The application of the sales and use tax to Computer/Software Services will not apply to personal or professional services that do not themselves constitute computer system design services or software modification services and that are not directly related to a particular systems integration project involving the sale of computer hardware or software. Examples of such non-taxable personal and professional services may include (a) consulting and evaluation services with respect to existing computer systems to identify deficiencies and needs, and (b) services to prepare a business to use modified software, such as training.
MA allows a vendor to accept an MPU, Multiple Points of Use Certificate, if the software or software services it provides will be used by the purchaser in more than one taxing jurisdiction. The acceptance of the MPU would relieve the vendor from the requirement to collect the sales tax and require the purchaser to determine the taxable amount of any software and/or services that are used in Massachusetts.
The following examples provide guidance for how a vendor should source software and/or services under the new statute:
Example: Vendor makes a taxable sale of customized software to a purchaser located in Massachusetts. The purchaser does not give the vendor an MPU certificate.
The sale is sourced as follows:
- If the purchaser receives the software at the vendor’s location, the sale is sourced to the vendor’s location.
- If “a” does not apply and the vendor delivers the software (e.g., by disk or by load and leave) to the customer’s location, the sale is sourced to the customer’s location.
- If “a” and “b” do not apply, the vendor performs no services at the customer’s location, and the customized software is downloaded to the customer’s server, which may be in or outside of Massachusetts, the sale is sourced to the customer’s address in the vendor’s books and records.
The DOR will be proposing guidelines in the future including amendments to existing regulation, but in the short term, the above guidance has been issued on the application of the new statute.
The statute takes effect on July 31, 2013 and applies to all sales made on or after that date. For ease of filing, MA has instructed vendors to include any sales made on July 31, 2013, with the sales made for August and file all of those as computer design services due with the August tax return on September 20, 2013.
Contracts for taxable Computer/Software Services entered into before July 31, 2013 are not taxable except to the extent a payment under such a contract is invoiced or billed (or if not invoiced or billed, due under the terms of the contract) on or after July 31, 2013 and only to the extent that the payment relates to services performed on or after July 31, 2013.
Should you have any questions concerning the above recently implemented changes in Massachusetts please contact your Marcum State and Local Tax Professional.