Overriding a veto from Governor Deval Patrick, the Massachusetts General Court late in July enacted a $500 million package of tax increases designed primarily to fund state and local transportation infrastructure projects. Governor Patrick had sought a broader tax increase, calling in his proposal for revenue hikes totaling $1.9 billion, aimed at more aggressive transportation spending and investments in education.

The Governor’s tax package included a very broad-based tax on computer services, including “cloud” computing services like remote data processing and data storage. The legislature pared that approach back significantly, but did so by substituting a new computer services tax of its own, effective July 31, 2013, that nevertheless is among the most far reaching in the country. The tax seemed to take many providers and consumers of computer services by surprise, but once word of its enactment got out, it touched off a wave of criticism, with opponents calling it unacceptably vague as well as threatening to the economy of a state that is highly dependent on the technology sector.


The new law expands the definition of taxable services, which was previously limited to telecommunications services, to include “the modification, integration, enhancement, installation, or configuration of standardized software,” as well as computer system design (CSD) services. CSD services are defined as “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.” The law specifically excludes from tax “data access, data processing or information management services.”

One of the most important new rules is the extension of the sales tax to the customization and implementation of enterprise-wide systems such as those sold by SAP and Oracle. Tax will apply to charges for such work whether it is sold by the supplier of the core system or by a third party.

The Massachusetts Department of Revenue (DOR) has already issued a technical information release and a series of frequently-asked questions, or FAQs, that shed some light on which other services may be taxed. According to these releases:

  • A “needs analysis” that is not directly related to a particular systems integration project is not taxable, but if the end result of such work is to “provide specifications,” and the customer ultimately engages a third party to sell it hardware and software according to the specifications, the design work itself is taxable. It’s not clear how the vendor of the needs analysis, who may be charged with collecting the tax, is supposed to know what its customer intends to do or actually does with its work product.
  • Separately stated charges for technical support and training are not taxable if they don’t involve taxable transfers of goods or services, but if the customer has no option to acquire the goods or services without the technical support and training it likely is taxable.
  •  “Troubleshooting” per se isn’t taxable. For example, removing a virus isn’t taxable, even if it’s necessary to reinstall software as part of the work.
  • Pure custom software isn’t taxable, at least in theory, but if a programmer incorporates free, Open Source software or other prewritten software into an application otherwise built for a single customer, the entire resulting product is taxable.
  • Website design may or may not be taxable, depending on whether Open Source or other prewritten software is used in the process. Just providing ideas for a website without any programming is not taxable.
  • Website hosting is not taxable.
  • Data storage and disaster recovery services in the “cloud,” standing alone, are not taxable.
  • Designing, implementing, enhancing or maintaining a local area network (LAN) is taxable.
  • Separately stated charges for data migration or conversion are not taxable even if the services are provided as part of a system implementation project.
  • Services performed for an organization by its own employees, whether permanent or temporary, are not taxed. Accordingly, the new law creates an incentive to “insource” otherwise taxable services. Note, however, that in certain circumstances services sold within a group of commonly-owned companies may be subject to tax.
  • Domain name registration and domain privacy services are not taxable.


An area that is bound to give rise to disputes is the web of rules designed to explain the extent to which Massachusetts tax applies where a business uses taxable services in more than one state. Early guidance from DOR implies that the rules that vendors of services must follow and those that a purchaser must employ in reporting “use tax” are not the same.

Rules for the Vendor

If Massachusetts has jurisdiction over a vendor of taxable services, it must register for purposes of collecting the tax. A purchaser of otherwise taxable services who will use the services in more than one state may give the vendor a “multiple points of use,” or “MPU,” certificate. If it does so, the vendor need not collect the tax, even if the purchaser will use the services largely in the Commonwealth.

If the purchaser does not present an MPU, the vendor is supposed to walk through a hierarchy of rules to determine if it must charge the tax:

  • If the purchaser “receives” the service at a business location of the vendor, the purchase is sourced there. In cases in which the work product of the vendor is not given to the purchaser on some sort of physical medium, it’s not clear where the service is deemed to be “received.”
  • If the vendor knows the location where the service is received by the purchaser based on instructions for delivery as provided by the purchaser, tax is due based on that location, when use of this address does not constitute bad faith.
  • If the purchaser does not specify a location for the service to be delivered, the vendor must collect tax based on the purchaser’s address that is known to the vendor as provided by the purchaser or based on information known to the vendor (e.g., as collected to complete the sale), such as address information from a payment instrument or credit card, when use of this address does not constitute bad faith.
  • If neither the delivery location nor the purchaser’s address can be determined, then the vendor must collect tax based on the address of the vendor from which the sale was made.

Rules for the Purchaser

Whether or not the purchaser provided an MPU certificate, if the vendor did not collect tax on the services and they were used in whole or in part in Massachusetts, the purchaser must self assess use tax on the purchase. In the case of software modification services, the sale is generally sourced the same way as the sale of the underlying software. For an enterprise software system used by all employees, that might be based on Massachusetts headcount divided by total headcount. With respect to other software, determining Massachusetts use may be more problematic. With respect to CSD services, the purchaser is supposed to pay tax where the computer system is used, but DOR has provided little guidance on where that is deemed to be. For all newly taxable services, the purchaser may use any reasonable method of sourcing that is “consistent and uniform” and supported by its books and records. Importantly, use of the location of a hosting server is not considered “reasonable” within these rules.


At present, very few states tax the services that Massachusetts has targeted in the new law. It can be expected, however, that the number of states imposing such a tax will expand in the coming years. As the states move in this direction, they may well take a different path with respect to sourcing issues. Some will likely tax such services based on the location of the server on which software is hosted. This raises the risk that the same transaction may be taxed in multiple states. While Massachusetts will allow a credit for sales and use taxes paid elsewhere against its own use tax, it does not offer any credit that can be applied against the sales tax. So if another state imposes tax based on server location, and Massachusetts imposes a sales tax based on the state of deemed receipt of the services, for example, more than 100% of a transaction may be taxed.


Under the guidance issued by DOR, no tax will apply to services performed under a contract entered into before the effective date of July 31, 2013 if the services were performed before the effective date, and no tax will apply even to services performed on or after that date if the vendor billed for the services before the effective date.


As the implications of the new law become more widely known, opposition to the tax is expected to grow. On August 7, a coalition of business interests led by the Massachusetts Taxpayers Foundation announced that it has filed with the Attorney General’s Office an initiative petition to repeal the new law. The ballot question would not go before the voters until the November 2014 general election, but the threat of repeal by popular vote could prompt the legislature to curtail or repeal the new tax in the interim.