Finance over Governor Patricks veto. This new legislation broadens the Massachusetts sales tax to include certain software-related services, described below. The new law goes into effect on July 31, 2013, at which point vendors providing such services must col- lect the 6.25% sales tax. Further, purchas- ers may have an obligation to remit use tax where the vendor fails to, or is excused from, collecting the tax. On July 25, 2013, the Massachusetts Department of Revenue issued Technical Information Release 13-10 (Directive) to pro- vide initial guidance with respect to this change. Taxable Software Related Services This new law imposes sales and use tax on the following software related services: the planning, consulting or designing of computer systems that integrate computer hardware, software or communication tech- nologies provided by a third party vendor (Computer System Design Services); and the modifcation, integration, enhancement, installation, or confguration of standardized software ("Software Modifcation Services). The Directive provides that Software Modifcation Services are generally software services that modify, enable, or adapt prewrit- ten software to meet the business or technical requirements of a particular purchaser and to operate on the purchasers computer systems, regardless of how those services are described or billed to the purchaser. They may also be characterized as "customization services. 2013 Gesmer Updegrove LLP. All rights Reserved. Gesmer.com 40 Broad Street, Boston, MA 02109 617. 350. 6800 This may be considered advertising under Mass. R. Prof. C. Rule 7.3(c) July 2013 New Law Applies Mass Sales and Use Tax to Software-Related Services The sales and use tax will not apply to per- sonal or professional services that do not them- selves constitute Computer System Design Services or Software Modifcation Services, and are not directly related to a particular sys- tems integration project involving the sale of computer hardware or software. For example, the new law does not apply to (i) consulting and evaluation services with respect to exist- ing computer systems to identify defciencies and needs; or (ii) services to prepare a busi- ness to use modifed software, such as training services. Sourcing Rules: When is the Sale Taxable in Massachusetts? A vendor of Software Modifcation Services or Computer System Design Services is now required to collect sales tax from the purchaser of such services if the sale is sourced to the purchaser in Massachusetts. For these pur- poses, the following rules must be applied in the order listed below: 1. If the purchaser receives the services at a business location of the vendor, the retail sale is sourced to that business location of the vendor. For example, if the purchaser receives customized software at the vendor's Massachusetts business location, the sale is subject to Massachusetts sales tax. 2. If the vendor knows the location where the services are received based on instructions for delivery as provided by the purchaser, sales tax is due based on that location, when use of this address does not constitute bad faith. For example, if the vendor delivers the customized software (e.g., by disk or load and leave) to the purchasers Rhode Island location, the sale ClientAdvisory the purchaser of such services must remit use tax on these services purchased for use in Massachusetts. The Directive provides that a purchaser of these services is liable for use tax on the portion of such services purchased for use in Massachusetts if (i) the purchaser provides a Multiple Points of Use Certifcate to a vendor; (ii) the vendor does not col- lect Massachusetts sales tax with regard to a sale because the sale of such services is not sourced to the purchaser in Massachusetts; (iii) the vendor is a remote seller that is not required to collect Massachusetts sales tax; or (iv) the vendor fails to collect Massachusetts sales tax as required. Transition Rule for Existing Contracts According to the Directive, contracts for Software Modifcation Services or Computer System Design Services entered into before July 31, 2013 are not taxable except (i) to the extent a payment under such a contract is invoiced, billed, or due under the terms of the contract on or after July 31, 2013 and (ii) only to the extent that the payment relates to services performed on or after July 31, 2012. If you would like to further discuss the rami- fcations of the new legislation, please call (617) 350-6800 and ask for David Moran or Jeff Groshek, or contact them at David.Moran@ gesmer.com or Jeff.Groshek@gesmer.com. is sourced there (so long as number 1 above does not apply). As a result, the vendor does not have to collect Massachusetts sales tax. 3. If the purchaser does not specify a loca- tion for the services to be delivered, the vendor must collect tax based on the purchasers address that is known to the vendor either as provided by the purchaser or based on informa- tion known to the vendor (e.g., as collected to complete the sale), such as address information from a credit card, when use of this address does not constitute bad faith. If both numbers 1 and 2 above do not apply and the customized soft- ware is downloaded to the purchasers server (which may be in or outside of Massachusetts), the sale is sourced to the purchasers address in the vendors books and records. 4. Finally, if neither the delivery location nor the purchasers address can be determined, then the vendor must collect tax based on the address of the vendor from which the sale was made. Specifcally, if neither the delivery loca- tion nor the purchasers address can be ascer- tained, a vendor who makes the sale from its Massachusetts address must collect the sales tax. MuItipIe Points of Use Certicate The purchaser of Software Modifcation Services or Computer System Design Services that will be available for use in more than one state may give the vendor a Multiple Points of Use Certifcate (Form ST-12). A vendor who receives such a certifcate is relieved from the obligation to collect sales tax on such services. This is because the purchaser is required to remit to Massachusetts the apportioned use tax. Payment of Use Tax by Purchaser Where a vendor of Software Modifcation Services or Computer System Design Services is not required (e.g., due to sourcing rules or a multiple points of use certifcate), or other- wise fails to collect Massachusetts sales tax, 2013 Gesmer Updegrove LLP. All rights Reserved. Gesmer.com 40 Broad Street, Boston, MA 02109 617. 350. 6800