• Massachusetts: New Tax on Computer and Software Services Sparks Battle, Confusion
  • September 10, 2013 | Authors: David M. Kall; Susan Millradt McGlone
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • Industry leaders are seeking to override H.B. 3535, the Transportation Finance Bill, which made various computer and software services subject to sales tax. Additionally, guidance provided by the Massachusetts Department of Revenue (the “Department”) and the volume of industry discussion on compliance with the law, indicate confusion and the complexity of complying with the law for many technology companies. McDonald Hopkins covered H.B. 3535 in a previous Multistate Tax Update.

    To date, various actions have been initiated in opposition to H.B. 3535, indicating general distaste for the new sales tax. First, business leaders have filed an initiative petition to the Massachusetts Attorney General to repeal the law. If the Attorney General determines that the petition is constitutional, the petitioners have until early December to collect approximately 69,000 certified voter signatures. If the requisite signatures are collected, the Legislature will then review the petition and decide whether to repeal, modify or take no action. If no action is taken, an additional 11,485 signatures must be collected and then the voters may decide to repeal the tax when they vote in November 2014. Secondly, Massachusetts Senator Karen Spilka filed a petition, S.D. 1872, to repeal the sales tax. This is significant because she previously voted in favor of the law.

    Technology businesses have been outspoken regarding their disdain for the law, stating that compliance with this law has been exceptionally difficult because the line between taxable services and those services not subject to sales tax is a hazy one. Businesses have been upset with the short time-frame (one week) legislators provided between the time the law passed and the time to begin compliance.

    To help alleviate taxpayers’ concerns with compliance with the law, the Department issued a FAQ page and continues to update it with additional questions. As of the date of this article, the Department’s FAQ page has ballooned to 9 pages and 55 questions. This is yet another indicator of the difficulty taxpayers have had in their efforts to comply with the law, as well as the general confusion caused by the imprecise language utilized in the law.

    The Massachusetts Taxpayers Foundation, a nonprofit nonpartisan tax think tank, estimates this tax could create $500 million in new tax revenue. It has been reported that others in the IT industry claim that number could actually reach $1 billion. Legislators originally intended for this change in law to add $161 million in revenue. Industry representatives claim that legislators did not tailor the law appropriately nor fully appreciated how far-reaching such a bill would be. At a minimum, industry representatives would have appreciated a seat at the table.

    Adding fuel to the outrage, on the same day the sales tax on these various computer services became effective (July 31), the Massachusetts Legislature passed S.B. 175 that authorized a sales tax holiday for August 10 and 11, 2013 for non-business sales costing $2,500 or less (with some exclusions). This new tax on computer and software services does not fall under the tax holiday.

    Democrats have overwhelming majorities in both legislative houses, making bipartisan support essential to repealing this law in the near term. In any event, it appears that Massachusetts taxpayers will have to live with the law for at least some time absent heightened legislative efforts.