Massachusetts Has a New Software Sales Tax

Taxachusetts, er, Massachusetts has had for years a reputation of being a high tax state. Lately, Massachusetts has become a somewhat better locale (based on taxes). It’s not that Massachusetts has improved; rather, other nearby states have enacted or increased taxes. Just when you thought you could throw away the Taxachusetts label, out comes a new sales tax.

Last month, the Massachusetts legislature passed a new sales tax on computer software services. At 6.25%, it’s the highest sales tax rate on this in the country. The tax applies to all “computer software, including pre-written upgrades, which is not designed and developed by the author.” The law was effective July 31, 2013.

One website has published a piece about how confusing this new tax is. Consider:

This added levy is not only cumbersome, it’s super confusing. For example:

  • if you install software (Microsoft Office, Constant Contact, Drupal, etc.), it’s taxable
  • if your client clicks the mouse to install it, it’s not taxable
  • training your client to use this software is not taxable
  • but if you “customize” or configure the software in any way, it’s taxable
  • if you don’t actually make any changes, but just discuss them and plan them, it’s consulting and not taxable
  • if you create graphic design mockups, it’s not taxable
  • but as soon as you implement that design (i.e. program it), it becomes taxable if you’re using “prewritten” software “not developed” by you (such as WordPress)

At least, that’s how we think it works.

The Massachusetts high-tech community is up in arms over the new tax. As Christopher Anderson, president of the Massachusetts High Technology Council, said in an interview on WBZ-TV (as reported in the Boston Globe,

“When we impose a tax that no other state in the country imposes as broadly as this, it is going to have an impact on those small and midsize companies, initially, in terms of their ability to win and retain business or add or retain employees,” he said.

“In fact, a number of them are telling me they may have to shed employees just to maintain the business load they have,” Anderson added in the interview with WBZ’s Jon Keller.

Democratic state Senator Karen Spilka has filed a bill to repeal the measure. Meanwhile, Florida Governor Rick Scott has urged unhappy Massachusetts companies to consider moving to the Sunshine State. I am certain that if this tax remains law Massachusetts will see some companies move out-of-state. Taxes matter, and when a business in Massachusetts faces a confusing 6.25% tax while a business in neighboring New Hampshire doesn’t, a business owner might just move.

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