For Massachusetts businesses, July 31 is normally just the MLB trade deadline, when employees are more interested in who the Red Sox axed than actual work. But this year, July 31 was also the day a new IT services tax kicks in. Wrapped up in a transportation bill, H.3535, the tax is defined in Section 48 and 49 and applies a 6.25 percent services tax to "computer system design services" and software services.
The broad terminology had mailing lists hopping with questions and outrage, including Hidden-Tech, which serves Western Massachusetts designers, programmers, and other technology-related professionals. "Here is what happens when we don't watch or have someone watching our business sector at a legislative level," wrote Rich Roth, Hidden-Tech's webmaster, in an email to the list-serv detailing the changes. The concern is that "computer system design services" and software services could extend to website designers, copywriters, and anyone who does any work at all related to technology.
There was enough confusion that the Massachusetts Department of Revenue published a Technical Information Release on its website to explain who will be affected by the law. According to the release, taxable services are the design, installation, consulting, and integration of computer hardware, software, or communications equipment -- like a consultant or third party modifying code in existing software to fit a business's needs.
Providers will now have to collect the 6.25 percent sales tax along with their existing fees to install, modify, design, or consult on software services for enterprises. The rules are the same for any sales tax in Massachusetts: enterprises using the software in Massachusetts must pay the tax to their vendor, if the vendor is based in Massachusetts. In other words, choosing a vendor from neighboring New Hampshire, Vermont, Rhode Island, or Connecticut can save companies money on software services.
The tax is supposed to raise $161 million for the Commonwealth of Massachusetts, geared toward transportation improvements like rail service across the state, better roads, and related projects, despite Massachusetts's revenue in the form of tolls on I-90 and the former 24 cent gas tax, now 27 cents. To put it in perspective, that $161 million is just half a percent of what the Commonwealth spends annually.
But the Massachusetts Taxpayers Foundation has said in published reports that the tax could actually raise $500 million for the Commonwealth -- and cost Massachusetts, a hotbed of technology companies, quite a few jobs. In addition, implementing it so quickly will also take a toll on technology companies, particularly smaller systems integrators and independent consultants whose bread-and-butter clients are located in Massachusetts, as well as strain the resources of healthcare providers who often need customized software to, for example, ensure that hospital beds are provisioned efficiently.
However, the original proposal from Governor Deval Patrick was much broader. That proposal would have taxed storage services as well, including disaster recovery services, something Massachusetts businesses are keenly aware of, given the unpredictable New England weather. This would have taxed the cloud and been very ambiguous -- would cloud storage service providers with datacenters out of state had to collect sales tax on services used in Massachusetts? And Massachusetts isn't leading the pack in taxing software services; four other states tax software services, albeit at much lower rates. Neighboring Connecticut only charges 1 percent, while New Mexico, which formerly charged the highest tax on software services, topped out at 5.125 percent.
Nevertheless, it comes at a time when many software specialists are consultants, often traveling to client locations and now bearing the brunt of an additional gas tax as well as having to raise their rates. It's not an ideal situation, and one that the Commonwealth shouldn't have foisted upon its technology and healthcare sectors.