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On July 24, 2013, the Massachusetts legis-

lature 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 col-
lect the 6.25% sales tax. Further, purchas-
ers 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 pro-
vide initial guidance with respect to this change.
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 tech-
nologies provided by a third party vendor
(Computer System Design Services); and
the modifcation, integration, enhancement,
installation, or confguration of standardized
software ("Software Modifcation Services).
The Directive provides that Software
Modifcation Services are generally software
services that modify, enable, or adapt prewrit-
ten software to meet the business or technical
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.
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July 2013
New Law Applies Mass Sales and Use
Tax to Software-Related Services
The sales and use tax will not apply to per-
sonal or professional services that do not them-
selves constitute Computer System Design
Services or Software Modifcation Services,
and are not directly related to a particular sys-
tems 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 exist-
ing computer systems to identify defciencies
and needs; or (ii) services to prepare a busi-
ness to use modifed software, such as training
services.
Sourcing Rules: When is the Sale
Taxable in Massachusetts?
A vendor of Software Modifcation 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 pur-
poses, 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 vendor's
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
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
ClientAdvisory
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 Certifcate
to a vendor; (ii) the vendor does not col-
lect 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 Modifcation 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 rami-
fcations 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.
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 loca-
tion 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 informa-
tion 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 soft-
ware 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. Specifcally, if neither the delivery loca-
tion nor the purchasers address can be ascer-
tained, a vendor who makes the sale from its
Massachusetts address must collect the sales
tax.
MuItipIe Points of Use Certicate
The purchaser of Software Modifcation
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 Certifcate (Form ST-12). A vendor who
receives such a certifcate 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.
Payment of Use Tax by Purchaser
Where a vendor of Software Modifcation
Services or Computer System Design Services
is not required (e.g., due to sourcing rules or
a multiple points of use certifcate), or other-
wise fails to collect Massachusetts sales tax,
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