Massachusetts – Taxability of Computer and Software Services

SALT Report 2782 – The Massachusetts Department of Revenue issued guidance regarding recently enacted legislation that imposes sales and use tax on computer and software services.  Pursuant to Chapters 64H and 64I of Massachusetts General Laws, sales and use tax will apply to computer system designs and to the modification, integration, enhancement, installation, or configuration of standardized or prewritten software, effective July 31, 2013.

With respect to the imposition of tax on software modification services, the legislation provides that tax applies to software services that modify, enable, or adapt prewritten software to meet the business or technical requirements of the purchaser and that operate on the purchaser’s computer systems.  This applies regardless of how the services are described or billed to the customer.

However, sales and use tax will not apply to personal or professional services that do not constitute computer system design services or software modification services, so long as they are not directly related to a systems integration project that involves the sale of computer hardware or software.  For example, consulting and evaluation services to identify deficiencies or needs, and services that are designed to train a business to use the modified software are not taxable.

If a contract for taxable computer or software services is entered into before July 31, 2013 the charges will not be taxable unless the customer is invoiced, billed, or the payment is due on or after July 31, 2013 and the payment relates to specific services that will be performed on or after July 31, 2013.

The Department’s notice also discusses sourcing rules, electronic filing requirements, calculating use tax liability, multiple points of use exemption certificates, and the impact on return filings and payments.

In addition, the Department anticipates that further guidance will be issued regarding the imposition of sales and use tax on computer system and design services and the amendment to Regulation 830 CMR 64H.1.3.

If you would like to submit a comment or suggestion regarding the application of sales and use taxes to computer and software services, please send them to rulesandregs@dor.state.ma.us.

For Further Information

Massachusetts Department of Revenue – Technical Information Release 13-10

Massachusetts State Legislature – H 3535