Massachusetts Legislature Overrides Governor’s Veto; Passes Transportation Finance Bill

On July 24, 2013, Massachusetts lawmakers voted to override Governor Deval Partick’s veto of the Commonwealth’s Transportation Finance Bill (“H.B. 3535”). As a result of the override, the gas tax will increase by three cents per gallon; tax on cigarettes will increase by one dollar per pack; and computer system design services and the modification, integration, enhancement, installation, or configuration of standardized software will now be subject to sales and use tax. The revenue generated from H.B. 3535, as appropriately entitled, is designed to aid Massachusetts’ transportation systems and projects. The gas and cigarette tax increases, and sales and use tax on computer services are effective July 31, 2013 (seven days from the enactment of H.B. 3535).

“Computer system design services” are the planning, consulting, or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party. “Modification, integration, enhancement, installation, or configuration of standardized software” are viewed 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, regardless of how those services are described or billed to the customer. These services may also be described as customization services for prewritten software.

On July 25, 2013, the Massachusetts Department of Revenue released Technical Information Release 13-10 (“TIR – 13-10”), which provides guidance for the application of sales and use tax to these newly taxed computer services. This guidance includes transition rules for existing computer services contracts, sales and use tax filing requirements, and information on sourcing rules, including Multiple Points of Use.

H.B. 3535 also adopts market-based sourcing and creates a throwout rule for corporate income tax purposes. Currently, sourcing is based on whether the income-producing activity is performed in Massachusetts or costs of performance rules, if the income-producing activity is performed both in and outside Massachusetts. Beginning January 1, 2014, sales other than sales of tangible personal property (e.g., sale, rental, lease, or license of real property; rental, lease or license of tangible personal property; sale of services; sale, lease or license of intangible property) will follow market-based sourcing rules. In the event that sales other than tangible personal property are sourced to a state where the taxpayer is not taxable, or it cannot be reasonably determined where the sales should be sourced, such sales will not be included in the numerator and denominator of the sales factor.

TECHNICAL INFORMATION CONTACT:

Jeremiah T. Lynch
Principal
Ryan
212.871.3901
jeremiah.lynch@ryan.com