April 16, 1980
Your California clients sell and lease computer hardware and software. You ask a number of questions with respect to the impact of Massachusetts sales and use taxes on your client's activities.
It is assumed for purposes of this ruling that you inquire about ********** sales or leases to Massachusetts customers, and except with respect to question 10, it is further assumed that your clients are engaged in business in Massachusetts.
(1) In some of your questions you ask whether a different tax result arises in the case of a sale and the case of a lease.
Massachusetts General Laws Chapter 64H, Section 1(12)(a) defines "sale" and "selling" for purposes of the sales tax as including "lease" and "rental." Thus, Massachusetts sales tax applies to rentals of tangible personal property, and Massachusetts use tax applies to storage, use or other consumption in Massachusetts of tangible personal property rented for storage, use or other consumption within Massachusetts. For purposes of the questions you raise, then, there is no difference in the tax treatment of sales and leases.
(2) One of your clients purchases computer equipment to be used in a dictation/transcription system, adds "proprietary software" to enable the equipment to perform the transcription function, and sells or leases the computer equipment and software as a package to a Massachusetts customer. You inquire whether the entire sale or rental price is subject to tax, whether or not the price of the software is separately stated.
It is ruled that the entire sale or rental price of the computer and accompanying software is taxable, whether or not the price of the software is separately stated.
(3) Your client builds a "dictionary" of information unique to the needs of each customer. The information is recorded on a magnetic disc. In billing for the disc, your client breaks out separate amounts for the cost of the disc to him, and for so-called "labor costs" associated with placing information on the disc. You inquire whether both components of the charge for the disc are subject to tax.
Chapter 64H, Section 1(14)(a) (ii) provides that, in determining the sales price, no deduction shall be taken on account of "the cost of materials used, labor or service cost, ... or other expenses."
Based on the foregoing, it is ruled that the total charge for the magnetic disc is subject to tax, whether or not components of the charge are separately stated.
(4) Your clients often lease equipment, charging a monthly fee based on a specified minimum level of usage; to the extent that a customer exceeds that usage, an additional amount measured by the excess is levied. You inquire whether the "overage" amount is subject to tax.
Chapter 64H, Section 1(6) defines the "gross receipts" subject to tax as the total sales price received by vendors as a consideration for retail sales.
Based on the foregoing, it is ruled that the entire rental charge, including any "overage" amount, is subject to tax.
(5) Your clients use lease agreements requiring the lessee to pay, or reimburse the lessor for, any property taxes imposed upon the equipment leased. You inquire whether charges for property tax reimbursement are subject to tax.
Based on the definition of "gross receipts" noted under question (4) above, it is ruled that such charges are subject to tax as part of the total sales price of the equipment leased.
(6) One of your clients charges a separately-stated monthly sum for maintenance of equipment sold or leased by it, and contracts with a third party who actually provides the maintenance. In the case of sales of equipment, the purchaser is free to accept or reject the maintenance contract. In the case of leases of equipment, the lessee is required to accept the maintenance contract by the terms of the lease. You inquire whether the maintenance charges are taxable in either case.
Chapter 64H, Section 1(14)(b)(i) provides that, in determining the sales price to which tax applies, any amount paid for any services that are a part of the sale shall be included. Therefore, it is ruled that charges for maintenance of computer equipment are subject to tax when provided on a mandatory basis to those who purchase or lease the equipment, but where the purchaser or lessee has the option to acquire the equipment either with or without the maintenance services, separately-stated charges for the services are not subject to tax.
(7) Your clients impose a one-time, separately-stated charge for installation of equipment sold. The installation generally consists of unpacking and testing of the equipment. You inquire whether this charge is subject to tax when associated with a sale or lease.
Chapter 64H, Section 1(14)(c)(iii) excludes from the sales price the amount charged for labor or services rendered in installing or applying the property sold.
Based on the foregoing, it is ruled that the separately-stated installation charges are not subject to tax.
(8) One of your clients ships equipment via common carrier, f.o.b. your client's warehouse. The client imposes a one-time, separately-stated charge for the actual cost of shipment from the warehouse to the customer. You inquire whether the charge is subject to tax.
Chapter 64H, Section 1(14)(c)(v) excludes from the sales price transportation charges separately stated, if the transportation occurs after the sale of the property is made.
Based on the foregoing, it is ruled that the separately stated shipping charges for transportation after the sale are not subject to tax.
(9) You inquire whether sales and leases to state and local governments are subject to tax.
Chapter 64H, Section 6(d) exempts from tax sales to the United States, the Commonwealth of Massachusetts or any political subdivision thereof, or their respective agencies. Therefore, sales and leases to Massachusetts and its political subdivisions, and their respective agencies, are exempt from tax.
(10) You inquire whether a client is subject to Massachusetts sales and use taxes, where it maintains no office and no inventory other than on-lease equipment in Massachusetts, but sends salesmen into Massachusetts to solicit business. (No order is considered final until accepted at the client's out-of-state headquarters.)
Chapter 64H, Section 7 provides that no person shall do business in Massachusetts as a vendor unless a registration shall have been issued to him for each place of business. Section 2 of that chapter requires vendors to pay over sales taxes to the Commissioner. Chapter 64I, Section 4 provides that
"[e]very vendor engaged in business in the commonwealth and making sales of tangible personal property for storage, use or other consumption in the commonwealth not exempted under this chapter, shall ... collect the [use] tax from the purchaser and give the purchaser a receipt therefor in the manner and form prescribed by the commissioner. The tax required to be collected by the vendor shall constitute a debt owed by the vendor to the commonwealth."
For purposes of both the sales and use tax laws, Chapter 64H, Section 1(5) defines "engaged in business in the commonwealth" as including
"having a business location in the commonwealth [or] regularly soliciting orders for the sale of tangible personal property by salesmen, solicitors, or representatives in the commonwealth, unless such activity consists solely of solicitation by direct mail or advertising via newspapers, radio or television; ... A person shall be considered to have a business location in the commonwealth only if such person ... (b) has one or more employees located in the commonwealth ... or (d) regularly leases out tangible personal property for use in the commonwealth. For the purposes of this paragraph, ... a person having a business location in the commonwealth solely by reason of regularly leasing out tangible personal property shall be considered to have a business location in the commonwealth only with respect to such leased property; and an employee shall be considered to be located in the commonwealth (a) if his service is performed entirely within the commonwealth; or (b) if his service is performed both within and without the commonwealth, but in the performance of his service he regularly commences his activities at, and returns to, a place within the commonwealth."
Based on the foregoing, it is ruled that your client must collect both sales and use taxes due the Commonwealth.
(11) You inquire whether your clients must pay Massachusetts sales and use taxes in cases in which their customers refuse to reimburse them for such taxes.
Chapter 64H, Section 2 requires vendors to pay over sales tax to the Commissioner at the time provided for filing returns. Chapter 64H, Section 1(14)(b)(ii) provides that any amount for which credit is given to the purchasers by the vendor is included in the sales price.
Chapter 64H, Section 3 requires each vendor to add to the sales price and collect from the purchaser the full amount of the sales tax. It further provides that such tax shall be a debt from the purchaser to the vendor when so added, recoverable at law in the same manner as other debts; Chapter 64I, Section 4 sets forth like provisions with respect to the use tax.
Thus, your clients' liability arises at the time of sale, whether or not the purchasers ever pay the sales price or reimburse your clients for the tax.
(12) You inquire whether rentals are taxed in Massachusetts under the sales or the use tax.
As noted above, Massachusetts sales tax applies to rentals as well as sales of tangible personal property, and Massachusetts use tax applies to storage, use or other consumption in Massachusetts of tangible personal property rented as well as sold for storage, use or other consumption within Massachusetts.
Since, under Chapter 64I, Section 4, a vendor engaged in business in Massachusetts must collect and pay over use taxes to the Commissioner, just as he must collect and pay over sales taxes under Chapter 64H, Sections 2 and 3, the obligations of your clients engaged in business in Massachusetts with respect to rentals of equipment in Massachusetts are the same under the use tax as under the sales tax.
(13) Finally, you inquire whether your out-of-state clients are subject to or required to collect local sales tax in the same manner as state sales tax, and whether Massachusetts law precludes imposition of local sales and use taxes.
The Massachusetts sales and use taxes are five percent taxes imposed at the state level; there is no authority for imposition of a local sales or use tax by any political subdivision of Massachusetts.
Very truly yours,
/s/L. Joyce Hampers
L. Joyce Hampers
Commissioner of Revenue