Are Your IT Costs Increasing Next Month? New Massachusetts Sales and Use Tax on Computer and Software Services becomes Effective July 31, 2013
On July 24th, 2013 the Massachusetts legislature passed An Act Relative to Transportation Finance ("the Act"), which, among other things, makes "computer system design services and the modification, integration, enhancement, installation or configuration of standardized software" taxable services under the Massachusetts sales and use taxes. Under the Act, "Computer system design services" is defined as "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 passed despite Massachusetts Governor Deval Patrick's veto, and the new tax becomes effective July 31st, 2013.
The Act makes Massachusetts one of four states that tax computer services. Maryland expanded its definition of taxable services to include computer services in November 2007, but the computer industry fought hard to reverse the decision. On April 8, 2008 the Maryland legislature repealed the tax before the changes took effect. Websites are already appearing to repeal the Massachusetts tax, but considering (a) the effective date and (b) that the legislature overturned the Governor's veto of the Act, a similar repeal in Massachusetts seems unlikely (at least in the near-term).
Customers and service providers alike should consult their tax attorneys to determine whether and to what extent the expanded definition of taxable services in Massachusetts impacts them. For basic information and guidance regarding the tax changes, you can refer to the Massachusetts Department of Revenue (DOR) technical information release 13-10 ("TIR 13-10"). The DOR has not yet updated Regulation 830 CMR 64H.1.3 (Computer Industry Services and Products) to reflect the new scope of taxable computer industry services but TIR 13-10 states that it intends to do so. The current Massachusetts sales and use tax rate is 6.25%.
Although computer services taxes are uncommon, changes in taxes are often contemplated by service agreements. If the Massachusetts tax changes impact you, you should (a) review how such taxes are treated under your services agreements, (b) engage your service providers to determine how and when they will invoice such taxes, and (c) communicate the changes to your internal stakeholders. If you are currently in the process of procuring services impacted by the Act, such as systems integration services, you should consider adjusting your financial business case to ensure you have an accurate total cost for procuring such services.
The DOR is requiring July and August taxes to be reported and paid in September ("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.").