Starting Wednesday, software consultants and developers in Massachusetts will be forced to slap a 6.25% sales tax onto their clients’ bills.
According to a technical information release from the Massachusetts Department of Revenue, software consultants must collect the tax if they perform “computer system design services and the modification, integration, enhancement, installation or configuration of standardized software.”
The Massachusetts House of Representatives last week voted 123-33, with the Senate voting 35-5, to overturn Gov. Deval Patrick’s veto of the legislation, which is set to raise US$500 million in tax revenue to invest mainly in transportation projects, according to State House News Service. The bill also raises taxes on gas and cigarettes. It is estimated that the software end of the tax hike will generate about $161 million in state revenue.
In a joint letter to the Department of Revenue, Brian Dempsey, chairman of the House Ways and Means Committee, and Stephen Brewer, chairman of the Senate Ways and Means panel, wrote, “Should the revenue or job impacts be greater than anticipated, or if the tax is imposed on vendors not intended, we will not hesitate to revisit these changes. We will remain vigilant as these changes to the sales tax are implemented to ensure that they have the impact we anticipate.”
Despite these pledges to monitor the effect of the tax on the software industry, no one knows exactly how it will affect the computer and software industry—a deeply embedded and integral part of the Massachusetts economy.
The Department of Revenue said in a statement that the tax would “not apply to personal or professional services that do not themselves constitute computer system design services or software modification services and that are not directly related to a particular systems integration project involving the sale of computer hardware or software.”
Then there are the wide-reaching implications of the key term—pre-written software—picked apart by Bill Wilder, co-owner of the Mass.-based consulting firm Development Partners Software, which specializes in cloud computing using the Windows Azure platform. He explained that the broad definition of “pre-written software”—a term for any software not written for a specific user or organization—could allow the tax to impact other areas of development, such as open-source software, third-party components, and cloud computing.
This kind of software service tax is unprecedented. According to New England Cable News, Michael J. Widmer, president of the Massachusetts Taxpayers Foundation (an independent, bi-partisan research organization) said, “This is the most far-reaching software services tax in the nation.”