Know the Law: Does your company owe Massachusetts taxes for computer software sales?
Q: I own a business that provides computer and software services to customers in Massachusetts. How can I determine whether I owe Massachusetts sales tax on these sales?
A: Massachusetts has extended its 6.25 percent sales and use tax to "computer system design services" and the "modification, integration, enhancement, installation or configuration of prewritten software." Pre-written software is software that is not designed to meet the specifications of a specific purchaser.
There are three questions that business owners need to answer in order to determine whether this new tax applies to them. First, are the services you are selling covered by the law? Second, do you have a "physical presence" in Massachusetts? And third, was the sale made to a customer in Massachusetts?
Figuring out whether the services you provide are subject to the tax can be challenging, since the covered services are so broadly defined. The Massachusetts Department of Revenue website is a good starting point for making this determination. In particular, the DOR has answered questions about many particular types of computer software and system design services in an FAQ at http://www.mass.gov/dor/utility/recent-tax-changes.html.
If your services are covered, you must collect Massachusetts sales tax only if your business has a "physical presence" in Massachusetts. A physical presence includes having an office in the state or visiting customers in the state to make sales calls or perform services. If your business does not have a physical presence in Massachusetts, you are not required to collect the tax, but your Massachusetts customers must self-report and pay it.
Finally, you must determine whether the sale occurred in Massachusetts. If the buyer receives the service at your business location, the sale is considered to have occurred at your business location. If not, then the sale is sourced (in the following order) to the delivery location or the buyer's address. If neither is known, the sale is considered to occur at your address (from which the sale was made). If after applying these rules, the sale is sourced to any state other than Massachusetts, no tax is due.
If you believe you need to start collecting the sales tax, you should register as a Massachusetts vendor through WebFile for Business at www.mass.gov/dor. The law is effective for services invoiced or billed and performed on or after July 31, 2013.
There are ongoing efforts to repeal or amend this new law. Stay tuned, and keep in touch with your tax advisors.
Catherine can be reached at firstname.lastname@example.org.
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