MA Tax on Software Services
Massachusetts sales and use tax has been expanded to apply to computer system design and software services through An Act Relative to Transportation Finance, St. 2013, c. 46, which passed over veto on July 24, 2013 to amend Chapters 64H and 64I of the General Laws. The effective date was July 31, 2013.
The amendments added the following definition:
“Computer system design services,” 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.
And the amendments also clarified and expanded the definition of taxable services, the definition of which now reads (emphasis added):
“Services,” a commodity consisting of activities engaged in by a person for another person for a consideration; provided, however, that the term “services” shall not include activities performed by a person who is not in a regular trade or business offering his services to the public, and shall not include services rendered to a member of an affiliated group, as defined by section 1504 of the Internal Revenue Code, by another member of the same affiliated group that does not sell to the public the type of service provided to its affiliate, or data access, data processing or information management services; and provided, further, that the term services shall be limited to the following items: telecommunications services, computer system design services and the modification, integration, enhancement, installation or configuration of standardized software. Nothing herein shall exempt from tax sales of tangible personal property subject to tax under this chapter.”
The new operative triggers are computer system design services and software modification services (the data and info provisions are a clarification of exclusions). The regs in this domain are at 830 CMR 64H.1.3 (Computer Industry Services and Products). Previous application to services exists in 830 CMR 64H1.3, e.g. at (4)(h) and (i), and at (7), but the new law broadens application.
The Massachuestts Department of Revenue issued a Technical Information Release (13-10) and an FAQ sheet to detail the new rules and help service providers comply. Key language from TIR 13-10 includes:
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.
That appears to be a conjunctive direction, meaning you would have to negate all the stated elements to be relieved. More key language comes via the FAQs on a question about open source projects and web design. It appears to say that, for example, a WordPress build would be taxable while a custom job from scratch would not be. A somewhat curious result because, given the ubiquitous reliance on prewritten libraries and snippets in the web design community, it’s hard to imagine an entirely custom build.
If the website designer is configuring or modifying Open Source (free) code or other prewritten software for the needs of a customer, the designer’s charges to that customer are subject to tax. If the website designer is creating custom software for its customer (that is, not based on other prewritten software), then the charges are not taxable.
If you are a Massachusetts registered vendor that’s subcontracting, don’t forget to consider an ST-4 resale certificate. And for a specific application of the for-profit resale issue to the nonprofit exemption space, note that a for-profit intermediary could purchase taxable software and services from a subcontractor, issue a resale certificate, and then take an exemption certificate from its nonprofit customer, thus avoiding the tax (though not the compliance) throughout the chain.
Contracts for services entered into before July 31, 2013 are not taxable except to the extent a payment is invoiced, billed or due under the contract on or after July 31, 2013, and only then to the extent that payment would relate to services performed on or after that date. On an even more minor compliance point, transactions for the day of July 31 are to be reported and paid together with August transactions by the September 20 due date for August transactions.
If you are required to report sales tax, you must register with the Department of Revenue and get set up to do so.
The financial burden of a tax on industry is always twofold: compliance processing and pricing pressure. The former is a short-run cost, and the latter a long-run cost. But Massachusetts has decided that, on balance, maintenance and expansion of its transportation infrastructure is the priority.
More guidance and changes to 830 CMR 64H1.3, along with enforcement actions to which particular cases can be compared, are forthcoming. You can provide comments in preparation for amendments to 830 CMR 64H1.3 to the Department of Revenue at email@example.com.