On September 27, Massachusetts Governor Deval Patrick signed legislation eliminating the sales tax on computer and software services which had been enacted earlier this year when the legislature voted to override the governor's veto of H.B. 3535, the state's transportation financing bill.1 The bill retroactively repeals the sales and use tax to the date the tax initially took effect, July 31, 2013.
This legislation includes a requirement for sellers to make reasonable efforts to return to purchasers any tax collected but not remitted to the Massachusetts Department of Revenue. The Department will be required to refund all tax that was remitted during the time the tax was in effect pursuant to refund applications to be available within 30 days and filed by December 31, 2013.
Sales and Use Tax on Computer and Software Services
Specifically, the legislation removes the expanded statutory definition of "services" that had included "computer system design services and the modification, integration, enhancement, installation or configuration of standardized software" and the phrase "or data access, data processing or information management services."2 Furthermore, the definition of the term "computer system design services"3 was repealed. All provisions of the bill became effective July 31, 2013.4
Any person who collected but did not yet remit to the Department a sales or use tax upon computer or software services taxable pursuant to the now-repealed sections of law for sales occurring from July 31, 2013 through September 26, 2013 must make reasonable efforts to return the sales or use taxes to the purchasers.5
The Department is expected to make available abatement forms within 30 days to allow persons who collected and remitted to the Department any sales or use tax collected on sales of computer or software services under the repealed law for services performed or sales occurring from July 31 through September 26.6 Upon receipt of the abated tax from the Department, the full amount must be remitted to the person who initially paid the sales or use tax. All applications for abatement must be filed with the Department on or before December 31, 2013.7
The legislation specifically prohibits any fines, penalties or fees from being imposed on persons who failed to pay and/or collect the sales or use tax on computer and software services taxable pursuant to the repealed law.8
Following the enactment of the repeal, the Department released additional guidance for vendors.9 The guidance confirms that vendors who collected but did not remit the tax must make reasonable efforts to return the tax to the customers that paid the tax to the vendors. Vendors who filed returns and remitted tax must electronically file abatement applications by using the "WebFile for Business" user account to complete and submit an amended return for the August 31, 2013 tax period. Finally, vendors who filed returns but did not remit the tax must also make reasonable efforts to return the tax to the customers that paid the tax to the vendors and electronically file the abatement applications discussed above. The Department also confirmed that the sales and use tax on standardized or prewritten software remains unchanged and in effect.
Commentary
Massachusetts had expected to collect approximately $160 million annually from the sales and use tax on computer and software services as originally enacted under the transportation financing bill which was earmarked to provide needed funds for infrastructure repairs. With the repeal of this tax, there is some sentiment that Massachusetts could face a budgetary shortfall and revenue-enhancing measures may be considered, including the potential elimination of the single sales factor currently applicable to certain types of companies for purposes of corporation income tax apportionment, the potential elimination or reduction of some credits, and/or a tax rate increase.
While nothing is certain, the Massachusetts House speaker and the Senate president have repeatedly addressed this concern by indicating that no budgetary shortfall is anticipated. Tax collections for the year are ahead of projections, and the state legislature expects that this trend will continue and should cover expected transportation expenses. Massachusetts also currently holds a $530 million surplus from the prior year.
Despite these assurances, the Massachusetts legislature has expressed interest in exploring any possible measures which would fairly provide sufficient revenue to fund the government. The Massachusetts Tax Fairness Commission was formed to accomplish this goal and is currently reviewing the Massachusetts tax structure. The Commission will consider the potential impact of several different tax strategies including imposing sales tax on services and a progressive income tax. The Commission is expected to play a significant role in leading the state legislature to a final decision regarding any future needs for tax increases.
Footnotes
1 Ch. 95 (H.B. 3662), Laws 2013.
2 MASS. GEN. LAWS ch. 64H, § 1.
3 Id.
4 H.B. 3662, § 8.
5 H.B. 3662, § 4.
6 H.B. 3662, § 5.
7 Id.
8 H.B. 3662, §§ 6, 7.
9 Technical Information Release 13-17, Massachusetts Department of Revenue, Sep. 30, 2013.
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