July 23, 2009

Transitional Relief Could Apply to Construction Industry as Massachusetts Hikes Sales Tax to 6.25 Percent on August 1, 2009

Holland & Knight Alert
James F. Millea

Under its recently enacted 2010 budget, Massachusetts has increased the state’s sales and use tax rate from 5 percent to 6.25 percent for transactions occurring on or after August 1, 2009. The sales tax applies to the sale and use of tangible personal property, including meals and telecommunications services. As of August 1, the sales tax will also apply to the previously exempt retail purchase of beer, wine and liquor.

On July 22, 2009, the Massachusetts Department of Revenue issued Technical Information Release 09-11, which establishes several transitional rules that permit existing contracts and arrangements to be taxed at 5 percent rather than 6.25 percent for a limited period of time after August 1, 2009. These rules, which defer the effective date of the tax rate increase, would directly benefit the construction industry. They include the following:

Sales of Building Materials and Supplies

Sales of building materials and supplies to be used in the construction, reconstruction, alteration, remodeling or repair of any building or structure will be taxed at 5 percent rather than 6.25 percent if the materials and supplies are to be used pursuant to a qualified contract entered into before August 1, 2009, or before October 1, 2009, if the contract is entered into in accordance with a bid that had to be submitted before August 1, 2009.

A qualified contract is one that requires the contractor to perform the work without conditions or escalator clauses with respect to the sale or use of the property in question. The sale or use must be completed before January 1, 2011.

Leases of Tangible Personal Property With Periodic Payments

For leases of tangible personal property such as equipment or motor vehicles, exceeding 30 days and paid on a periodic basis, the due date of the payment determines the sales tax rate. If the due date of a payment falls on or after August 1, 2009, tax is due on that payment at the rate of 6.25 percent. For rentals of tangible personal property not to exceed 30 days, the date the customer takes possession of the property determines the sales tax rate.

Periodic Bills for Utilities

Retail sales of gas, steam, electricity or telecommunications services billed on a recurring basis become subject to the new 6.25 percent rate for the first billing period starting on or after August 1, 2009.

Certain Unconditional Contracts for the Sale of Property

Certain qualified written contracts for the sale of tangible personal property subject to sales or use tax entered into prior to August 1, 2009 will be subject to the 5 percent rate provided that the property is delivered to the retail customer before October 30, 2009. Property delivered on October 30 or later will be subject to the 6.25 percent rate regardless of the contract terms.

For purposes of this rule, a qualified contract is a contract that imposes an unconditional liability on the purchaser to buy the goods at a fixed price without an escalator clause and an unconditional liability on the part of the vendor to deliver a definite quantity of such goods at the contract price. Vendors must report all such sales on their July sales tax return. Although full payment before August 1, 2009 is not required, contracts that are paid in full prior to August 1, 2009 will be presumed to be unconditional.

The transition rules regarding unconditional sales contracts do not apply to (1) sales or use tax on motor vehicles, trailers, snow vehicles, recreation vehicles or boats, which are taxed as of the date of sale; (2) leases or rentals of tangible personal property discussed previously; or (3) sales of meals, which are taxed as of the date the meal is served or delivered to the customer.

Administrative Issues

The Department of Revenue is developing administrative procedures to implement the transition rules, which may require filing additional forms with vendors to claim the benefit of the transition rule.

Holland & Knight is ready to assist if you have questions regarding the transition rules or other aspects of the increase in the Massachusetts sales tax. We have the experience and knowledge to help deal with these or other tax law changes.

Related Insights