Massachusetts Enacts Tax on Computer Services – Repealed Retroactively

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)

Posted on August 26, 2013