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3(c)

ClientAdvisory
July 2013 (8/1/13 rev.)

New Law Applies Mass Sales and Use Tax to Software-Related Services
On July 24, 2013, the Massachusetts legislature passed An Act Relative to Transportation 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 collect the 6.25% sales tax. Further, purchasers 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 provide initial guidance with respect to this change. In apparent response to questions and comments about the new law, the DOR posted an FAQ on the DOR web site at www.mass.gov/ dor/docs/dor/law-changes/faqss-computersoftware-2013.pdf on July 31, 2013. 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. The sales and use tax will not apply to personal or professional services that do not themselves constitute Computer System Design Services or Software Modification Services, and are not directly related to a particular systems 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 existing computer systems to identify deficiencies and needs; or (ii) services to prepare a business to use modified software, such as training services.

Sourcing Rules: When is the Sale Taxable in Massachusetts?

A vendor of Software Modification 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 purposes, 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 vendors 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
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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 technologies provided by a third party vendor (Computer System Design Services); and the modification, integration, enhancement, installation, or configuration of standardized software (Software Modification Services). The Directive provides that Software Modification Services are generally software services that modify, enable, or adapt prewritten software to meet the business or technical
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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 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 location 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 information 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 software 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. Specifically, if neither the delivery location nor the purchasers address can be ascertained, a vendor who makes the sale from its Massachusetts address must collect the sales tax.

Payment of Use Tax by Purchaser

Where a vendor of Software Modification Services or Computer System Design Services is not required (e.g., due to sourcing rules or a multiple points of use certificate), or otherwise fails to collect Massachusetts sales tax, 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 Certificate to a vendor; (ii) the vendor does not collect 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 Modification 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 ramifications 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.

Multiple Points of Use Certificate

The purchaser of Software Modification 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 Certificate (Form ST-12). A vendor who receives such a certificate 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.

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