The 'Tech Tax'

Effective July 31, 2013, Massachusetts expanded the application of its sales and use tax to include certain types of computer and software services.

Sales and Use Tax in general

Generally, sales tax is charged on tangible items; if you can touch it, see it and smell it, it is subject to tax (there are exceptions, of course). Thus far, the only services subject to taxation have been telecommunications services.

How it applies in the computer and software industry: Then and now

In the software and computer industry, only sales of tangible computer hardware, and pre-written computer software were taxable. All other services were exempt from taxation.

Now, the most recent amendment to the Massachusetts sales and use tax regulations (TIR 13-10) expands the tax to include certain computer and software services that previously were exempt from tax.

What you should know about the “tech tax”

As a computer and software provider, you should already be charging a sales tax on pre-written software and computer hardware that you resell to your clients in Massachusetts.

Effective July 31, 2013 TIR 13-10 now requires you to closely analyze the nature of the computer services you provide, to determine if your services now fall under the definition of “computer system design services and the modification, integration, enhancement, installation or configuration of standardized software”

So let’s take a look at what this means  

The two types of computer services that are now subject to sales tax are:

 1.       “Computer system design services” defined as:

The planning, consulting or designing of computer systems that integrate with computer hardware, software or communication technologies and are provided by a vendor or a third party.

2.       “The modification, integration, enhancement, installation or configuration of standardized software” defined as:

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

This type of service is also referred to as “Software modification services” or “Customization services with respect to prewritten software”

 Other computer and software services that do not fall into the above two definitions are exempt from sales and use tax.

What this means to you

Services to consult and design a computer system with a client’s specific needs in mind is considered taxable, whether or not you end up reselling any hardware or software as part of the project.

Services to set up newly purchased computer systems by installing and/or configuring prewritten software is considered taxable.

It doesn’t matter where you physically perform the work, or where your servers and/or your clients’ servers are located; if your client is located in Massachusetts, then any taxable service you perform, as defined under Massachusetts law, is subject to Massachusetts sales tax. You, as the vendor, are responsible to collect and remit the tax. If a client has multiple locations, one of which is Massachusetts, then as the vendor, you are responsible to allocate your invoice to figure out which portion is subject to Massachusetts sales tax.

The new amendments to the Massachusetts sales and use tax regulations attempt to address, for the first time, the realities of technology that transcends physical and geographical boundaries, and changes one of the fundamentals of sales and use tax application, which is the location of the services performed.