Revoked in part by TIR 13-17
The following is a Technical Information Release concerning recently-enacted sales and use tax changes effective July 31, 2013. The purpose of this TIR is to announce the statutory changes and their effective date, and to provide initial guidance. However, the Department also solicits input from affected taxpayers regarding application of the sales/use tax on computer system design services and software modification services to particular transactions or business practices. DOR anticipates that further guidance will be provided in the future, including an amendment to Regulation 830 CMR 64H.1.3.
If you wish to submit comments or suggestions regarding the application of sales and use taxes to these computer/software services, please send them to email@example.com . DOR also anticipates that there will be opportunity for public comment on a working draft of the regulation amendment before it is formally proposed.
Pursuant to newly-enacted legislation, An Act Relative to Transportation Finance, St. 2013, c. 46 (“the Act”), which became law on July 24, 2013, Chapters 64H and 64I of the General Laws have been amended to apply the sales and use tax to certain services relating to computer system design and to modification, integration, enhancement, installation, or configuration of standardized or prewritten software. St. 2013, c. 46, §§ 48, 49, 89. The changes are effective 7 days after the Act became law, and therefore the effective date of these changes is July 31, 2013. The purpose of this TIR is to provide initial guidance regarding these statutory changes, the applicable sourcing rules, transition rules for existing contracts, electronic filing requirements, calculation of use tax liability, and the effective date and its impact on filings and payments.
The Department of Revenue will issue such further guidance in the future as is determined to be necessary or appropriate, including an amendment to Regulation 830 CMR 64H.1.3. For this purpose, the Department invites input from affected taxpayers regarding application of the sales/use tax on these services to particular transactions or business practices. Comments or suggestions may be sent to firstname.lastname@example.org . The Department also anticipates that there will be opportunity for public comment on a working draft of the regulation amendment before it is formally proposed.
II. Statutory Changes:
The Act added the following new definition to section 1 of Chapter 64H of the General Laws:
“’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.”
The Act also amended the definition, in section 1 of Chapter 64H, of “services” that are taxable under Massachusetts sales and use taxes. As amended, that section reads as follows:
“’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.” (Amended language in italics.)
With respect to the amended statutory language imposing tax on modification, integration, enhancement, installation, or configuration of standardized software, hereafter referred to as “software modification services,” the new provisions serve as overlapping descriptions generally intending to tax software services that modify, enable, or adapt prewritten software to meet the business or technical requirements of a particular purchaser and to 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 with respect to prewritten software.
All of the above taxable services – i.e., both computer system design services, as defined, and the “software modification services” described in the preceding paragraph – are hereafter collectively referred to in this TIR as “Computer/Software 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.
The Department intends to provide additional guidance in the future regarding the application of the tax on computer system design services and software modification services.
III. Sourcing Rules: When is the Sale or Use Taxable in Massachusetts?
A. General Rule
A vendor of Computer/Software Services is required to collect Massachusetts sales/use tax from the purchaser of such services if the sale is sourced to the customer in Massachusetts under the rules stated in part III.C of this TIR. However, the vendor is relieved from the obligation to collect such tax in the event that the purchaser provides an MPU certificate to the vendor, as described in part III.B of this TIR. The purchaser is liable for use tax on the portion of the services purchased for use in Massachusetts as provided in part III.B and D of this TIR if (1) the purchaser provides an MPU certificate to a vendor of Computer/Software Services; (2) the vendor does not collect Massachusetts tax with regard to a sale because the sale of such services is not sourced to the purchaser in Massachusetts; (3) the vendor is a remote seller that is not required to collect Massachusetts sales/use tax; or (4) the vendor fails to collect Massachusetts sales/use tax as required.
B. Multiple Points of Use Certificate (“MPU”)
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) 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 and sales of computer system design services are not necessarily sourced in the same manner. 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. The purchaser may use a method of apportionment reasonably designed to reflect the location of use of the modified software by the purchaser, where such method is consistent and uniform and is supported by the purchaser’s books and records. Generally, one or more MPUs that are provided for prewritten software and modifications to that software must use the same apportionment methodology.
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.
In the case of the purchase of Computer/Software Services for use by two or more members of an affiliated group of corporations or other commonly controlled entities engaged in the same general line of business, the use of the Computer/Software Services should be determined on a group basis. To the extent that such services are purchased for use in such line of business in Massachusetts, the Commissioner may require any of the group members benefiting from the use of the services in Massachusetts to report the use tax on such purchase on an appropriately apportioned basis.
C. Sales Tax Collection by Vendor where No MPU Provided
If the purchaser has not given the vendor a Multiple Points of Use Certificate for the Computer/Software Services, then for purposes of sourcing the sale a vendor required to collect tax under Chapters 64H and 64I must apply the rules set forth below in the order of priority listed, as applicable, and must collect and remit Massachusetts tax on the transaction if the sale is sourced to Massachusetts under these rules:
- If the purchaser receives the service at a business location of the vendor, the retail sale is sourced to that business location of the vendor.
- If the vendor knows the location where the service is received by the purchaser based on instructions for delivery as provided by the purchaser, tax is due based on that location, when use of this address does not constitute bad faith.
- If the purchaser does not specify a location for the service to be delivered, the vendor must collect tax based on the purchaser’s address that is known to the vendor as provided by the purchaser or based on information known to the vendor (e.g., as collected to complete the sale), such as address information from a payment instrument or credit card, when use of this address does not constitute bad faith.
- If neither the delivery location nor the purchaser’s address can be determined, then the vendor must collect tax based on the address of the vendor from which the sale was made.
- If the purchaser receives the service at a business location of the vendor, the retail sale is sourced to that business location of the vendor.
- 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:
a. If the purchaser receives the software at the vendor’s location, the sale is sourced to the vendor’s location, under “a” above.
b. 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, under “b” above.
c. 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, under “c”, above (assuming such information is available and the conditions of “c” are otherwise satisfied).
D. Payment of Use Tax by Purchaser
Where a vendor of taxable prewritten software or Computer/Software Services is not required, or otherwise fails, to collect Massachusetts sales tax, the purchaser must remit apportioned use tax on the software or services purchased for use in Massachusetts subject to the credit for taxes paid to other jurisdictions as provided by G.L. c. 64I, § 7(c). The purchaser may use a reasonable, but consistent and uniform, method of apportionment that is designed to reflect the location of use of the modified software in the case of a purchase of software modification services, and the location of use of the computer system design work in the case of a purchase of computer system design services. Such method of apportionment must be supported by the purchaser’s books and records as provided in 830 CMR 64H.1.3(15), and be consistent with the principles and limitations described in part III.B, supra.
IV. Transition Rule for Existing Contracts
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.
V. Filing Requirements
Pursuant to the authority in G.L. c. 62C, § 5, the Commissioner will require sales or use tax on Computer/Software Services to be separately reported and paid electronically through Webfile for Business. The on-line Form ST-9 will be available on or about July 31, 2013, and will provide additional lines for the separate reporting of tax on Computer/Software Services. As noted in part VI of this TIR below, for the convenience of both taxpayers and to facilitate administration, DOR directs that Computer/Software Services transactions for July 31, 2013 shall be reported and paid together with August 2013 transactions by the September 20, 2013 due date for August 2013 transactions. The revised on-line Form ST-10 (Annual Business Use Tax Return) will be available later in 2013.
VI. Effective Date
The sales and use taxes on Computer/Software Services described in this TIR apply to transactions on or after July 31, 2013. For the convenience of taxpayers and to facilitate administration, DOR directs that Computer/Software Services transactions for July 31, 2013 shall be reported and paid together with August 2013 transactions by the September 20, 2013 due date for August 2013 transactions. See part IV of this TIR regarding contracts in existence prior to the effective date.
Commissioner of Revenue
July 25, 2013
 G.L. c. 64I, § 7(c) exempts from use tax “(s)ales upon which the purchaser has paid a tax or made reimbursement therefor to a vendor or retailer under the laws of any state or territory of the United States, provided that such tax was legally due without any right to a refund or credit thereof and that such other state or territory allows a corresponding exemption with respect to the sale or use of tangible personal property or services upon which such a sales or use tax was paid to this state. To the extent that the tax imposed by this chapter is at a higher rate than the rate of tax in the first taxing jurisdiction, this exemption shall be inapplicable and the tax imposed by this chapter shall apply to the extent of the difference in such rates.”
As indicated in III B. of this TIR, in the case of affiliated entities in the same line of business, the use tax may be remitted by any member benefiting from the use of the taxable service in Massachusetts. Sales tax paid to another jurisdiction by any of the affiliated users may be considered in the calculation of the credit under G.L. c. 64I, § 7(c).