By Jay M. Rosen, Esq.
Small Massachusetts-based companies need to be aware of the most significant change in the Commonwealth's taxation of software in 16 years taking effect on April 1, 2006. At that time, companies will be required to pay 5% sales tax on any software applications they purchase for download over the internet, including all upgrades and maintenance fees. The law also applies to so-called "load-and-leave" delivery, through which a software maker installs the program on your computer. The quiet tax hike was included in a package of "loophole" closing legislation approved last year with the full support of Governor Mitt Romney.
Under the new law, which applies to only pre-programmed software bought by companies, rather than custom applications, companies purchasing software slated for use in multiple states will now be responsible for paying the 5% tax on software by filing with the Department of Revenue ("DOR") Form ST-9 "Monthly Sales or Use" or Form ST-10 "Business Use." If, in the alternative, a company uses the purchased software only in Massachusetts, then vendors selling the software to companies will be responsible for collecting the tax at point-of-sale. If vendors are not registered with the DOR, then the purchasing company will be responsible for paying the tax directly to the DOR by filing the Forms mentioned above.
In closing any potential loopholes, the new tax law prohibits companies from dodging the tax by downloading software onto computer servers located in other states that don't tax downloaded software (such as California and New Jersey) and then allowing its Massachusetts-based employees access to the application in that state.
Companies need to be aware that because business software is often sold with maintenance contracts, periodic updates, upgrades and bug fixes, such supplemental software purchases are likely in line to become taxable as well.
This legislation has raised further concerns among Massachusetts-based companies that the new law is only the beginning of a bid in Massachusetts to tax other types of media delivered over the internet such as music and video.
Please call Attorney Jeffrey Schlossberg at 781.848.5028 for more information.