Many questions surround the new Massachusetts tech tax

Technology businesses in Massachusetts are scrambling to understand how a new tech tax will affect their businesses. The new law became effective on July 31, 2013 and expands the 6.25 percent sales tax to certain information technology services. Taxes raised will finance transportation improvements.

The Commonwealth’s Transportation Bill (H.B. 3535) taxes the following services:

  • The “modification, integration, enhancement, installation or configuration of standardized software,”
  • “Computer system design services,” and
  • Telecommuting services.

The new business taxation law generally affects companies who customize taxable prewritten software for the needs of an individual customer. Companies that create computer systems by integrating computer software and hardware along with installing and training users on the system will also need to collect the sales tax.

Four other states tax software services. However, the rate charged by the other states is not as high at the Massachusetts rate.

Concerns expressed by the business community

Massachusetts business leaders worry that they will not be able to pass the tax onto customers and that it will cut into profit margins. Many fear the uncertainty and liability around implementation of the tax.

An effort to repeal the tax is underway. An initiative petition was filed with the state’s attorney general, which could prompt a change in the legislation. In addition, several state legislators have moved to repeal the new sales tax.

Uncertainty over taxable services

The Massachusetts Department of Revenue recently published guidance on the scope of the sales and use tax. Very specific examples were addressed. One example was helpful for website design companies. A website designer who uses open source software to complete a project will not need to collect the tech tax from customers.

Services to create a custom plug-in for Excel, on the other hand, would be taxed. This is because the modification enhances the functionality of prewritten software.

Separating services on the same project could be necessary, because of different tax treatment. A software developer’s time spent planning (i.e. meeting with a client to address needs and developing a project plan) is not taxable. Time spent modifying prewritten software, however, would be taxable. A Massachusetts business lawyer will be able to offer guidance on which services are subject to the tech tax.

If you have questions about how the new tech tax will affect your business, contact an experienced business tax attorney. Many questions exist about which actual services will be subject to the new taxes. Companies required to collect the new sales tax will need to register with the state, as well as report and remit sales taxes in September.