Massachusetts Computer-System Design/Software Services Now Taxed at 6.25% Effective July 31, 2013

by M. Robinson & Company, P.C.
Contact

On Wednesday, July 24, 2013, the Massachusetts Legislature overrode Governor Patrick’s veto and enacted a 6.25 percent sales tax on computer-system design/software services. The new tax is part of the new $800 million transportation bill. The new tax becomes effective on Wednesday, July 31, 2013.

The new law taxes “the modification, integration, enhancement, installation or configuration of standardized software.” M.G.L. c. 64H § 1 (new definition of “services” subject to sales and use tax) (effective July 31, 2013). The scope of the new tax on software modification services is reasonably well-defined. TIR 13-10—which provides guidance on the new law—states that “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.” TIR 13-10: Sales and Use Tax on Computer Software Services Law Changes Effective July 31, 2013 (emphasis added).

The new law also taxes “the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies” where these services are provided by a “vendor or a third party.” M.G.L. c. 64H § 1 (new definition of “Computer system design services” subject to sales and use tax) (effective July 31, 2013). Unlike the new statutory language relating to computer software, the provisions regarding “computer system design services” are inherently ambiguous and TIR 13-10 fails to explain exactly how they will work. For example, TIR 13-10 fails to address the following points:

Suppose a taxpayer purchases software along with a computer, monitor, printer and keyboard. If an outside vendor installs the software and connects the cables for the hardware, does the installation of the software and cabling of the hardware now constitute taxable “consulting” services that “integrate” hardware and software? Or would these services be considered consulting and evaluation services “not directly related to a particular systems integration project involving the sale of computer hardware or software.” TIR 13-10, Part II.

The new computer systems design tax seems to apply to the “planning” and “design” of server systems that allow PCs to “talk” with each other and use software and data stored on the server. Arguably, these server systems “integrate hardware, software or communication technologies.” Does it make a difference whether the computer server is owned by the customer or is owned by an unrelated third-party (i.e., “cloud computing”)?

Suppose the new computer systems design tax applies to cloud computing (i.e., a third party provides access to computer software through a shared program accessible via the internet) and the server where the program resides is located outside Massachusetts. Is the out-of-state vendor liable for the Massachusetts sales tax on design services on the basis that the out-of-state vendor is providing computer design services to Massachusetts businesses and thus has “economic nexus” with Massachusetts?

The computer systems design tax does not apply unless the services are provided by a “vendor or a third party.” Thus, if a business uses an employee to design computer systems, the tax does not apply. But it is unclear whether the new tax applies if the business uses an employee (chief communications officer) and one or more independent contractors to design computer systems. Does it matter if the independent contractor is treated as an “employee” for payroll tax and workers’ compensation purposes? Furthermore, should the Department of Revenue be concerned about the potentially discriminatory impact that this new tax might have on small businesses that are unable to maintain in-house IT departments?

The inherent ambiguities in portions of the new law jeopardize those who sell computers and computer design/modification services, placing them in a cruel dilemma. Vendors who mistakenly collect a sales tax on computer design/modification services will find themselves at a significant competitive disadvantage vis a vis those vendors who do not collect the tax.

Vendors who fail to collect a valid sales tax may find themselves in an even worse situation. Vendors are required, by law, to include sales taxes on their invoices and to collect and remit sales taxes in a timely fashion, whether or not the tax is collected at the point of sale from the purchaser. As a practical matter, vendors who do not collect the sales tax “up front” (i.e., at the point of sale) may find it impossible to collect the tax at a later time. Meanwhile, the president, board of directors, and chief financial officers might find themselves personally responsible for any unpaid sales taxes on services including penalties and interest on the unpaid tax and penalties. These unpaid taxes, penalties and interest add up quickly. Computer design sales of $1.6 million translates into $100,000 in sales taxes without considering penalties and interest. Indeed, proponents of the tax expect the tax to bring in about $161 million in new tax revenue on an annual basis.

Therefore, vendors may want to consider the following options:

Send informal comments and suggestions to the Massachusetts Department of Revenue. TIR 13-10 encourages taxpayers to submit “comments or suggestions regarding the application of sales and use taxes to . . . computer/software services.” The Department of Revenue also anticipates that there will be “opportunity for public comment on a working draft of the regulation amendment before it is formally proposed.”

Come together as an industry and present the Massachusetts Department of Revenue (“MDOR”) with a proposed regulation. The MDOR will likely welcome this type of intervention. The problem with this approach is that it takes time and there is no guarantee that the computer design industry will be able to coalesce around an agreed-upon regulation.

Request individual letter rulings from the MDOR. Vendors may choose—with the assistance of general counsel or outside counsel—to request a private letter ruling from the Massachusetts Department of Revenue based on the facts and circumstances of individual cases.

What are letter rulings? They are rulings issued by the Massachusetts Department of Revenue to a particular taxpayer. There is no filing fee involved in requesting a ruling. The professional fees, however, can be substantial. Technically, the ruling protects only the taxpayer that applies for the ruling. Normally, however, the Massachusetts Department of Revenue will treat all similarly situated taxpayers equally as long as all have acted in good faith.

Why might a taxpayer opt for requesting a private letter ruling instead of submitting an industry-approved draft regulation to the Massachusetts Department of Revenue? First, letter rulings are tailored to the specific needs of the requesting taxpayer and do not consider the tax consequences to the requestor’s competitors. Second, ruling requests (unlike drafting proposed regulations) can be crafted, drafted and filed fairly quickly. Third, the professional fees associated with requesting private letter rulings are often quite reasonable when weighed against the requestor’s competitive and financial exposures, as outlined above. For all these reasons, requesting a private letter ruling may be preferable to submitting an industry-approved draft regulation to the Massachusetts Department of Revenue.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© M. Robinson & Company, P.C. | Attorney Advertising

Written by:

M. Robinson & Company, P.C.
Contact
more
less

M. Robinson & Company, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!