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Subscriptions to a taxpayer’s electronic database are not subject to Massachusetts sales and use tax because the taxpayer is selling database services and not the use of software. The subscriptions are not taxable whether or not they are bundled with additional support or services. The taxpayer’s database allows subscribers to find information about purchasers and suppliers of products. The taxpayer’s software organizes data, extracts relevant information, combines data, and identifies patterns in data. Customers access the database via a website, and no software is downloaded by the customer. The object of the transaction is to access data for the purpose of obtaining information and not to use software. As a result, the subscription is not subject to sales and use tax. (Letter Ruling 14-1, Massachusetts Department of Revenue, February 10, 2014)

(03/31/2014)

Representative Lamar Smith (Republican, Texas) has introduced a bill to bar multiple taxes on digital goods and services.  Smith had proposed an earlier bill which failed to pass.  This bill is a revised version of the earlier bill. The proposed bill – called the Digital Goods and Services Tax Fairness Act of 2013 – would only allow a state to tax sales of digital goods and services to customers with a tax address within that state. Additionally, states would be barred from imposing multiple taxes on digital goods. The bill defines digital goods as sounds, images, data and facts maintained in digital form. Internet access service is not included as a digital good in the bill. (H.R. 3724)

(01/28/2014)

Massachusetts has revised a letter ruling addressing the sales and use tax treatment of cloud computing products. The revised ruling states that sales of cloud computing products are not subject to tax when the products are used with the purchaser’s own application software or open-source operating system software because there is no sale of prewritten software.  Additionally, cloud computing products that include operating system software licensed by the taxpayer from a third party are not subject to tax. The cost of the operating system software license is included in the charge to the customer, but there is no contractual sublicensing of the software and no separately stated charge for the software. The inclusion of the operating system software is incidental, and the object of the transaction remains the access to the seller’s computing resources and storage capacity. The seller is liable for use tax on the cost of prewritten operating system software that it consumes in the provision of nontaxable services to Massachusetts customers. Charges for remote storage service are not subject to tax because the object of the transaction is the use of capacity in the seller’s hardware to store or back up the customer’s data. In those instances where both services and the right to use software are integrated or bundled in one transaction, an “object of the transaction test” will be applied to determine whether the transaction is for the purchase or use of software which is taxable regardless of method of delivery or whether the transaction is for a non-taxable service with incidental use of software.  Service providers and purchasers of Cloud computing should carefully review their transactions to determine the object of the transaction.(Letter Ruling 12-8, Massachusetts Department of Revenue, November 8, 2013)

(11/26/2013)

The Massachusetts Senate and House of Representatives have voted to override a veto from Governor Deval Patrick and enact legislation that imposes sales and use tax on computer system design services and the modification, integration, enhancement, installation, or configuration of standardized software.  "Computer system design services" means 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. The purchaser of Computer/Software Services that will be concurrently available for use in more than one jurisdiction may, but is not required to, give the vendor a Multiple Points of Use Certificate (Form ST-12 - see line 9) 2 for such services in accordance with the general rules provided in 830 CMR 64H.1.3(15) for purchases of prewritten software. The MPU certificate relieves the vendor of liability for collecting tax and requires the purchaser to remit apportioned use tax on the Computer/Software Services in the manner provided in 830 CMR 64H.1.3(15).   Sales of software modification services relating to prewritten software generally should be sourced in the same manner as the software to which the services relate.  In sourcing sales of computer system design services, the purchaser similarly may use a method of apportionment reasonably designed to reflect, in this case, the location of use of the computer system design work by the purchaser, where such method is consistent and uniform and is supported by the purchaser's books and records. However, in general this work will be considered to be used by those parts of a business that utilize the computer system and in the locations where such use occurs. Generally, use of this work will not be limited to the business headquarters or other location where the design services may have been performed.  The tax does not apply to data access, data processing, or information management services. 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.  The Department of Revenue is compiling FAQ and other information on the change. 

 

UPDATE: On September 16, 2013, the Massachusetts Department of Revenue released an information bulletin in regards to the tax on computer services.  In light of public statements of support for repeal of the new tax provisions, the state is delaying the reporting of any sales tax collected on applicable computer software and services for July 31 - August 31 until October 20, 2013. Under normal circumstances the tax would have been reportable on September 20th. The extension is designed to minimize administrative burden on vendors during a period when the Legislature is likely to be considering repeal of the new tax provisions.  Note that the filing extension does not apply to returns and payments with respect to any other sales or use taxes that are unaffected by the law changes referred to above.

 

UPDATE: On September 27, 2013, Governor Deval Patrick signed legislation repealing the sales and use taxes on computer software services retroactively to July 31, 2013. Any business which collected this tax between July 31, 2013 and September 27, 2013 is required to return it to the customer who paid it. Businesses which have already filed a return and submitted these taxes are eligible for a refund by electronically amending their returns. Vendors must return refunds to customers within 30 days of receipt. The legislation gives vendors until December 31, 2013 to file for these refunds.  (Effective July 31, 2013. H.B. 3535/H.B. 3581, Laws 2013, TIR 13-10; TIR 13-14: Extension of Due Date for First Reporting of Sales and Use Tax on Computer and Software Services)

(09/30/2013)

Sales of virtual computing offerings, including remote access, remote support, and online conferencing, are subject to Massachusetts sales and use tax when sold to customers located in Massachusetts.  The sales are subject to tax because the true object of the transactions is the use of computer software. The fact that the provider may provide personal and professional services in connection with the offerings is inconsequential. The customer’s involvement with and use of the provider’s software with these offerings is essential to meeting the customer’s objectives.  Each of the virtual offerings is designed so that the customer accesses and uses prewritten software with little or no interaction with the provider’s employees.   No analysis, content, or data is provided to the customer by the provider beyond the software’s functionality.  As a result, the customer is purchasing the right to use the provider’s software, and the sale is subject to sales and use tax. (Letter Ruling 12-10, Massachusetts Department of Revenue, September 25, 2012)

(06/12/2013)

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