Massachusetts legislators were in a mood to tax at the end of July. Even the governor’s veto of the transportation funding bill was overridden by the state House and Senate. With in that bill were a few different means of increasing taxes to fund transportation costs. The gasoline tax was raid from 21 cents per gallon to 24 cents per gallon and calls for the tax to be tied to inflation starting in 2015. The cigarette tax increased by $1 from $2.51 to $3.51 per pack. Finally, computer services are now taxed at the 6.25 percent sales tax rate. This makes Massachusetts the fourth state to implement a computer service tax after Hawaii, New Mexico, and South Dakota.
Due to the broad nature of “computer services”, the Massachusetts Department of Revenue issued a Technical Information Release to interpret the new tax. It made the tax effective July 31st. TIR 13-10 clarifies the recently-enacted sales/use tax and also requests input from taxpayers regarding its application. The TIR is still very dry and technical. It’s as fun as you might expect reading tax law would be.
“Computer services” seem to consist of:
“‘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.”
[T]he 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;[1] 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.
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.
The general rule for when to apply the tax follows:
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.
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.
It implements a complicated amount of overhead on computer/software companies where their customers may be able to avoid the tax and another point for collecting and submitting taxes. If a vendor does not tax a purchaser, it is the purchaser’s responsibility to remit the use tax.
The burden of the new tax is put on the consultant companies to fund transportation costs. It increases the barrier of entry for new and smaller businesses with fewer resources. I am glad Illinois does not have this service tax (yet) though my regular clients are tax-exempt, non-profits.
Hat tip: TaxFoundation.org