Massachusetts Sales and Use Tax & Audit Guide

This guide is for businesses that need straightforward answers on the following Massachusetts Sales and Use Tax subjects:

• Should I collect Massachusetts sales tax?
• What is Massachusetts use tax, and should I pay or collect it?
• I collected Massachusetts sales tax and did not remit it, now what?
• I received a Notice that I’m being audited by the Massachusetts Department of Revenue, now what?
• Guidance on fighting a sales tax assessment in Massachusetts.

Who Needs to Collect Massachusetts Sales and Use Tax?

Like most states, to be subject to Massachusetts sales tax collection and its rules, your business must:

1) Have nexus with Massachusetts, and

2) Sell or use something that is subject to Massachusetts sales tax.

How Is Nexus Established in Massachusetts?

According to the Massachusetts Department of Revenue, sales tax nexus is created in Massachusetts if a business has a physical presence in Massachusetts, such as:

1. Obtaining and maintaining an office or space in Massachusetts to conduct business
2. Having independent sales reps, employees, or agents conducting business, permanently or temporarily, in the state, including soliciting sales, collecting on current or delinquent accounts delivering property, or taking orders for taxable items in Massachusetts.
3. Performing services, such as assembling, installing, servicing, or repairing products in Massachusetts.
4. Providing services, such as maintenance or repairs to property.
5. Providing customers technical assistance or services including, but not limited to, engineering assistance, design service, quality control, product inspections, or similar services.
6. Owning, renting, or leasing real property or tangible personal property in Massachusetts, including a computer server or software to solicit orders for taxable items.
7. Using your company-owned or leased truck to deliver goods to customers within Massachusetts.
8. Maintaining inventory in Massachusetts using a third-party fulfillment service, such as Fulfilled by Amazon (“FBA”).

Additionally, business that do not have a physical presence in Massachusetts, can establish economic nexus by exceeding a certain annual sales threshold in the state. See the next section for details.

Economic Nexus (Wayfair Law) and Internet Sales in Massachusetts

Effective October 1, 2019, Massachusetts requires that an out of state business (a.k.a. remote sellers) with the Massachusetts Department of Revenue to collect and remit sales and use tax if the business has a total sales revenue in the state of more than $100,000 in the preceding twelve calendar months. Once the $100,000 sales threshold is exceeded, the seller must obtain a permit and begin collecting Massachusetts sales and use tax no later than the first day of the fourth month after the month in which the threshold was exceeded.

For more information, see Remote vendors FAQs for Sales and Use tax.

Massachusetts Sales Made Through Marketplace Providers

If your business sells on Amazon or a similar marketplace provider, you may not have to collect sales and use tax on those sales. Specifically, if the marketplace provider certifies they are collecting and reporting sales tax, you are off the hook. However, such sales may count towards your total sales threshold, potentially requiring your business to collect tax on sales made directly through your website or other marketplaces.

For more information, see Marketplace Facilitator & Market Seller Nexus

Which Sales Are Subject to Massachusetts Sales Tax?

General Transactions

If you have nexus in Massachusetts, the next step is to determine whether the products or services you sell are subject to Massachusetts sales and use tax. Like most states, unless an item is specifically exempt, sales and rentals of tangible personal property are subject to Massachusetts sales tax.

While the general rules seem straightforward, the application of Massachusetts’s sales tax rules and their nuances, complexities, and application to your business can get complicated. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.

Some common exempt items in Massachusetts include:

• Newspapers and magazines
• Admission Tickets
• Food & Clothing
• Newspapers, Magazines, and other periodicals
• Personal or Professional Services, such as Accounting, Insurance, and Legal
• Utilities and heating fuel
• Telephone Services to residential users
• Transportation Services
• Resales

Taxability of Software in Massachusetts

Massachusetts has detailed information as to the taxability of software and related issues. broadly taxes prewritten computer software, regardless of the method of delivery. Conversely, the sale of custom software is viewed as purchasing the professional service of the programmer and generally exempt in Massachusetts. Massachusetts broadly taxes software as service.

Shipping and Handling

Massachusetts takes the position that delivery and shipping charges associated with the sale of tangible property are exempt from taxable sales price. If, however, shipping and handling is not including during the time of purchase, the charge of delivery is subject to sales tax.

Specific Industries

While the general sales tax rules seem straightforward, the application of those rules can get tricky when gray areas come up. These guides were developed by the Massachusetts Department of Revenue to provide some industry specific guidance.

• Agricultural Production Machinery
• Massachusetts Guide for Sales Tax Exemptions for Data Centers
• Massachusetts Sales Tax Guide for Remote sellers and Marketplace Facilitator

Determining Local Sales Tax Rates in Massachusetts

Massachusetts's base statewide sales tax rate is 6.625%. Counties and cities in Massachusetts do not charge any additional sales tax.

Local Sales and Use Tax Tables

The following tax table shows the total sales tax rate for each city.

I Should Have Collected Massachusetts Sales Tax, But I Didn’t

Unlike many of our competitors who offer a one size fits all solution and blindly suggest filing a Voluntary Disclosure Agreement (VDA) in each state, our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.

If you determine your business has nexus but you have not collected Massachusetts sales tax, the primary options are to:

1. Register and pay back taxes, penalties, and interest, or
2. Submit a letter to DOR requesting voluntary disclosure and settlement of an uncertain tax issue(s)

For more information, see Voluntary Disclosure Program for the Settlement of Uncertain Tax Issues

Here is what you need to know about each option to make the best decision for your business:

Option 1: Register to Pay Back Taxes, Penalties, and Interest

Sometimes the best solution for a business is simply to register with Massachusetts and pay back taxes, penalties, and interest. A VDA is not cost-effective if the past liabilities and penalties are minimal. Be wary of the tax professionals that recommend doing a VDA in these cases, they are looking to make a buck rather than looking out for your best interests. If you’re unsure what your past liabilities are, contact us and one of our state tax professionals will work with you to conduct an analysis and help you make the right choice for your business.

When to consider registration and payment:

• If you established nexus less than 3 or 4 years ago.
• The sales tax penalty is LESS than the professional fees charged for the VDA.
• Your business does NOT have a sales tax collected issue.

Beware: Requesting a VDA does not generally eliminate past liabilities

Option 2: Voluntary Disclosure Agreement (VDA)

In many situations, voluntary disclosures are a useful tool to reduce extended periods of past exposure. For example, if you should have been collecting sales tax for 10 years, the voluntary disclosure limits the lookback period to 3 years but may be expanded up to 7 years. As a result, the benefit of doing a VDA often turns on:

• Whether the VDA limits lookback period. i.e. – you established nexus more than 3 or 4 years ago.
• The sales tax penalty savings is MORE than the professional fees charged for the VDA.
• You have a sales tax collected but not remitted issue.

I Received a Massachusetts Sales and Use Tax Audit Notice, What Should I Do?

Massachusetts regularly audits businesses that are required to charge, collect, and remit various taxes in the state. Businesses that receive sales and use tax audit notice should consider the following:

• Unless you have experience handling Massachusetts sales and use tax audits, how can you trust that the state’s auditor is abiding by the rules and following proper procedure?
• How will you know when to provide documents or when to push back?
• Do you have a thorough understanding of your sales and use tax areas of exposure?
• Controlling the audit is paramount to the limiting exposure and shaping the results. Are you confident in doing that on your own?

If you are unsure of the answer to these questions and you do not have experience handling Massachusetts sales tax audits, hiring a professional might be right for you. Contact us and learn how our sales tax professionals can give you the peace-of-mind and confidence you need during your audit.

Please visit our resource pages for more detailed information and to help you evaluate critical decisions during your Massachusetts sales and use tax audit.

• The Audit Overview & Selection Process
• The General Audit Process
• Statute of Limitations Extensions & Issues
• Managing the Sales Tax Auditor

Massachusetts Sales Tax Audit Process

The Massachusetts Department of Revenue usually engages in two main types of audit: A Desk Audit or a Field Audit. A desk audit is an audit performed by an auditor, at a desk (you guessed it), by comparing data the MA DOR already has or reviewing a specific transaction or transactions. In short, there usually is a discrete purpose for receiving a desk audit notice. During a desk audit, the Business can expect:

• A notice stating the nature of the issue
• Ask the taxpayer why it disagrees with the notice
• Provide a deadline upon which the response is due

A field audit, however, is a more in depth review by a MA DOR auditor, in which the auditor reviews the books and records of the taxpayer and often visits the location. This type of audit is more general in nature. During a field audit, the Department will:

• Describe records they want to complete the audit
• Explain the audit plan and procedures
• Provide the business with the Massachusetts Taxpayer Bill of Rights
• Determine records to be reviewed

A field audit will follow the general timeline described below:

What to Expect After You Receive a Massachusetts Sales and Use Tax Audit Notice (Massachusetts Routine Audit Letter)

Many audits begin with a call out of the blue from a Massachusetts Department of Revenue’s sales tax auditor. Shortly after the call, your business will receive an audit notice which confirms that you were lucky enough to be chosen for a Massachusetts sale and use tax audit. To prepare for the audit, it is likely a good idea to start by getting a state and local tax professional involved.

What to Expect from A Massachusetts Sales Tax Auditor

• Auditor will conduct pre audit research.
• Auditor will often schedule and perform an entrance conference.
• Records will be requested (many of which the auditor is not entitled to and does not need).

What to Expect During the Audit

Once the necessary records are received, the auditor will:

• Conduct the audit by comparing your Massachusetts sales and use tax returns to your federal income tax returns or bank statements to determine whether all applicable sales, or gross sales, were reported on your Massachusetts sales tax return(s).

NOTE: A slight error in how tax was charged on even a single type of transaction, when multiplied over three years, can add up to a considerable sales tax liability.

Once the auditor is confident all sales are accounted for, they will review your exempt and out-of-state sales.

• Conduct a use tax audit – the auditor will request a detail of certain documents / accounts to make sure use tax was properly paid on applicable purchases. Common areas audited include:
  • Advertising Expense
  • Auto & Truck Expense
  • Repair and Maintenance
  • Office Expense
  • Miscellaneous Expense
  • Supplies
  • Equipment

Despite publications to the contrary, if a business buys an item online without paying use tax, the business still has an obligation to remit the tax to Massachusetts. This often leads to shocking results for the unsuspecting taxpayer during an audit.

After the Audit – Understand and Defend Your Businesses Rights

Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report with corresponding workpapers to support the Massachusetts sales and use tax assessment. It is advisable to have a sales tax professional present during this meeting as this is your first opportunity to see the auditor’s findings and push back on areas where they have overstepped their bounds or misapplied Massachusetts’ sales tax laws.

We recommend businesses refrain from agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their Massachusetts sales tax liability.

The process of challenging a Massachusetts sales tax audit assessment is discussed in detail in the following sections.

Massachusetts Sales Tax Audit Protest Process Flow Chart

NOTE: If the deadlines are missed, you have a short period of time to pay the tax and seek a refund. If that deadline is also missed, it can be very difficult to get case reopened.

Contesting Audit Findings with the Auditor

After an audit, the auditor will issue a Massachusetts Notification of Audit Results (AKA the audit report). This document details the auditor’s findings so it’s important to carefully review and understand its implications. Any issues with the results are handled as follows:

• Auditee has 25 days to contest findings with the auditor.
  • Documentational issues (exemption certificates, proof tax was paid, etc.) and calculations are worth addressing with the auditor.
  • Legal interpretations of sales tax law are often not resolvable at this stage.
• If a resolution cannot be reached with the auditor, the next step is to appeal/protest the issue with the Massachusetts Department of Revenue.

Appeal / Protest with the Massachusetts Department of Revenue

Any contested issues that were unresolved prior to the audit report being issued can be protested / appealed by the auditee. This is done after the Massachusetts Department of Revenue issues a Notice of Assessment (NOA)

• A protest / appeal must be done within 30-60 days (depending on audit type) of the Notice of assessment.
• If you miss the 60 days, in some cases you have may have additional time to pay the tax and file a refund claim.
• If both periods are missed, the assessment becomes final, and it is very difficult to reopen the audit.

If you have received a Notification of Audit Results and have not at least talked to someone experienced in Massachusetts State and Local tax, now is the time before these deadlines are missed.

Final Assessment

If you cannot resolve the Massachusetts sales and use tax dispute through the protest / appeal process, the Massachusetts Department of Revenue will issue a decision on the appeal. The appellate decision gives you the opportunity to file in Massachusetts’s Appellate Tax Board. There are important deadlines in this phase of the process as well, such as 60 days to file an appeal.

Massachusetts Sales Tax Auditor Playbooks

What better way to know what the other team might have in store than to read their playbook? We can’t think of anything either. So, we compiled these links to the manuals provided by the Massachusetts Department of Revenue to their auditors for conducting audits of various industries.

Settling a Massachusetts Sales Tax Liability

Along the way, or even after one the critical notices are issued, there is the possibility to settle your Massachusetts sales tax case by negotiating with the Massachusetts Department of Revenue. Often, you can get better results here than with the auditor. If you or your professional seldom does state and local tax work, it might be difficult to evaluate fair versus unreasonable settlements. DO NOT try to negotiate a settlement without an experienced Massachusetts state and local tax lawyer or other professional.

Contest a Massachusetts Jeopardy Assessment

Massachusetts may issue a Notice of Jeopardy Determination in certain situations. The jeopardy assessment gives Massachusetts Department of Revenue accelerated rights and it may immediately begin to try and collect. Due to the jeopardy nature, the taxpayer only has 20 days to contest the assessment and must place a security deposit to fight the issue.

Massachusetts Administrative Court

If you cannot resolve the case within the agency or missed your deadlines, you still have one last shot to fight your Massachusetts sales tax assessment by going to the Appellate Tax Board. Although we generally don’t recommend it, you always have the option to skip the agency protest process and file in administrative court. That said, because neither party wants to spend the time and resources on the uncertainty of administrative court, continuing to challenge the assessment is often an effective way to maximize your settlement potential.

If your case is filed in administrative court, and the case proceeds to hearing, it is heard and decided by a neutral appellate panel. Our team has handled hundreds of administrative court cases and can help your company receive the resolution it is entitled to. It is very similar to a court hearing and having an experienced representative is imperative.

Other Massachusetts Sales Tax Resources

• Massachusetts Department of Revenue Sales Tax Website
• Massachusetts Appellate Tax Board Decisions
• Massachusetts Department of Revenue Remote Seller and Marketplace Facilitator
• Massachusetts Sales Tax Notices
• Massachusetts Sales Tax Letter Rulings