On July 24, 2013, the Massachusetts legislature enacted HB 3535, a substantial transportation finance bill that makes several changes to the Massachusetts tax code. The most notable changes include:



• The extension of the sales tax to cover computer system design

services

• A change in the apportionment formula to reflect market-based

sourcing for certain sales

• An increase in the gasoline sales tax

• An increase in the cigarette excise tax



Imposition of sales tax on computer design services and other items



HB 3535 expands the definition of services that are subject to the Massachusetts sales tax to include “computer design services and the modification, integration, enhancement, installation or configuration of standardized software.” The legislation defines computer design services 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 legislation provides specific exclusions. Taxable services neither include “activities performed by a person who is not in the regular trade or business of offering their services to the public,” nor cover services rendered to a member of an affiliated group, as defined by section 1504, by another member of the group that does not sell the same type of services to the public. Data access, data processing and information management services are excluded from the tax base as well.



This expansion of the sales tax base could have profound implications. Many technology executives and trade groups have expressed concern that this legislation is drafted too broadly. Some critics have also noted that “computer design services” is vaguely defined and could be applied to almost any business that relies on third-party software vendors.



These changes are scheduled to take effect July 31, 2013.



Market-based sourcing



Following a recent trend in other states, HB 3535 changes the way sales, other than sales of tangible personal property, are sourced to Massachusetts. The law currently states that sales, other than sales of tangible personal property, are in Massachusetts if the income-producing activity (or the greatest proportion thereof) is performed in Massachusetts. The legislation alters this to state that sales of property other than tangible personal property are considered Massachusetts sales if the corporation’s market for the sale is in Massachusetts.



The legislation articulates five situations when the corporation’s market for a sale is considered to be in Massachusetts:



1. In the case of a sale, rental, lease or license of real property, if and

to the extent the property is located in Massachusetts

2. In the case of a rental, lease or license of tangible personal

property, if and to the extent the property is located in Massachusetts

3. In the case of the sale of a service, if and to the extent the service is

delivered to a location in Massachusetts

4. In the case of a lease or license of intangible property (including a

sale where the receipts from the sale are contingent on the

productivity, use or disposition of the property), if and to the extent

the intangible property is used in Massachusetts

5. In the case of a sale of intangible property that does not fall under

(4), where the property sold is a contract right, government license

or similar intangible property that authorizes the holder to conduct a

business in a specific geographical area, if and to the extent the

intangible property is used in or otherwise associated with

Massachusetts



The legislation also contains a throw-out provision. Ordinarily, the sales factor is a fraction, the numerator of which is the total sales of the corporation in Massachusetts and the denominator of which is the total sales of the corporation during the taxable year. However, the throw-out provision excludes from both the numerator and the denominator all sales other than sales of tangible personal property if (1) the sales are not taxed in the state to which they are assigned, or (2) the state to which the sales should be assigned cannot be determined.



This change will take effect for tax years beginning on or after Jan. 1, 2014, and may have a substantial impact on planning, cash taxes and deferred items.



Gasoline and cigarette tax rate increases



The gasoline tax will increase by 3 cents per gallon to 24 cents per gallon. Additionally, beginning in 2015, the tax will be indexed to inflation.



The cigarette excise tax will increase by 5 cents per cigarette to 15.05 cents per cigarette (about a $1 per package increase).



The gasoline and cigarette tax rate increases will take effect on July 31, 2013.



, State & Local Tax Manager, Boston, Mass.

, State & Local Tax Partner, Boston, Mass

MassachusettsThe legislation also contains a throw-out provision. Ordinarily, the sales factor is a fraction, the numerator of which is the total sales of the corporation in Massachusetts and the denominator of which is the total sales of the corporation during the taxable year. However, the throw-out provision excludes from both the numerator and the denominator all sales other than sales of tangible personal property if (1) the sales are not taxed in the state to which they are assigned, or (2) the state to which the sales should be assigned cannot be determined.This change will take effect for tax years beginning on or after Jan. 1, 2014, and may have a substantial impact on planning, cash taxes and deferred items.The gasoline tax will increase by 3 cents per gallon to 24 cents per gallon. Additionally, beginning in 2015, the tax will be indexed to inflation.The cigarette excise tax will increase by 5 cents per cigarette to 15.05 cents per cigarette (about a $1 per package increase).The gasoline and cigarette tax rate increases will take effect on July 31, 2013. Leanne Oneschuk , State & Local Tax Manager, Boston, Mass. Girard Brisbois , State & Local Tax Partner, Boston, Mass





