Massachusetts Delays Reporting for Software Services Tax; Repeal Imminent?

by Reed Smith
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With the drumbeat for repeal of the new software services tax growing louder, the Massachusetts Department of Revenue today pushed back the date for reporting and remitting sales and use tax collected or accrued on sales governed by the new law until October 20 for monthly filers.

Less than two months after its controversial enactment, several major proponents of the passage of the Massachusetts software services tax, including Governor Patrick and Democratic leaders of both the House and Senate, have reversed course and are supporting a vote to repeal the tax.

In light of these developments, the Department of Revenue issued Technical Information Release 13-14 and instructed taxpayers that have accrued use tax on purchases of taxable software services made between July 31 and August 31, that they are not required to report those purchases on their Massachusetts use tax return until the September return due October 20. Similarly, vendors that have made taxable sales under the new software service tax between July 31 and August 31 should not report these sales on their August sales tax return. Instead, vendors should wait and report these sales on their September return as well.

Given the uncertainty surrounding the scope of the services subject to the tax, if the tax were to be repealed, the only approach that would make sense is a complete repeal retroactive to the date it was implemented—July 31, 2013. Making the repeal effective any other date would serve to preserve all the administrative difficulties that the tax was expected to create, while still sacrificing most of the revenue that the tax was expected to produce. In contrast, a repeal retroactive to July 31 will allow the Department of Revenue to avoid the need to promulgate rules and to train auditors to apply a complex tax that would only be in effect for a few short months. In addition, a repeal of the tax retroactive to July 31 will allow taxpayers and the Department to avoid costly litigation. By issuing guidance delaying the remittance of any tax collected under the software services tax until next month, the Department appears to be anticipating the possibility that any repeal would be retroactive.

Taxpayers that have made or are planning to make purchases including software services should follow any repeal legislation closely. Vendors making sales of taxable software services should also follow any repeal legislation closely, because vendors would be required to refund any tax collected from their customers on sales of software services if the tax is ultimately repealed retroactively.

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.

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