Yesterday, Massachusetts House lawmakers voted to repeal the “tech tax,” or Sales and Use Tax on Computer and Software Services. We at BlueMetal strongly supported this repeal, and we wanted to share our thoughts on the tax.
The background: on July 24, 2013, the Commonwealth of Massachusetts announced Technical Information Release (TIR) 13-10 which allowed the state to apply sales and use tax to certain services related to computer system design and to modification, integration, enhancement, installation or configuration of standardized or prewritten software. These changes were effective July 31, 2013. This piece of legislature was slated to draw approximately $161 million dollars in revenue from the tech community in state.
The realities of the adoption, in conjunction with the haste at which the tax was imposed, is that it is difficult (if not impossible) to implement this tax law. It required consulting service organizations that were implementing standardized software for clients to segment time tracking down to the hours that were spent on each particular facet of the client experience from discovery, scoping, coding, rollout and training. If consulting were a simple formula then this would be fine, but anyone who is actually involved in a consulting practice knows that adaptations to plan happen as a normal course of doing business. Imposing tax to a portion of a consultant’s time based on the loosely defined parameters of this legislature is nearly impossible to do with any margin of accuracy.
From a direct business perspective, we at BlueMetal were not going to be impacted directly by this tax law for the following reasons:
- We are not in the business of implementing standardized software as it is defined in the existing Computer Industry Products and Services Regulation, 830 CMR 64H.1.3, as follows:
“computer software, including prewritten upgrades, which is not designed and developed by the author or other creator to the specifications of a specific purchaser. The combining of two or more prewritten computer software programs or prewritten portions thereof does not cause the combination to be other than prewritten computer software. Prewritten computer software includes software designed and developed by the author or other creator to the specifications of a specific purchaser when it is sold to a person other than the specific purchaser. Where a person modifies or enhances computer software of which the person is not the author or creator, the person shall be deemed to be the author or creator only of such person’s modifications or enhancements. …”
- Modifications to prewritten software that are subject to tax under the new law are modifications to software which is licensed, sold or otherwise made available to more than one user, where such prewritten software is modified for the use of a specific customer. The modification may be made either by the original seller/licensor of the software or by a third party. For purposes of this tax on modification, integration, enhancement, installation or configuration of standardized (prewritten) software, prewritten software does not include proprietary code owned by the provider (seller) of the modifications if that proprietary code is not separately licensed to customers. Custom application software (including custom software that incorporates such proprietary code) that is designed to run on a prewritten operating system is treated as custom software and not as a modification of the prewritten operating system software.
- There had been speculation regarding taxability of Open Source software and the State came back in August to revise their response as follows: Open Source Software is available free on the Internet. Thus, no tax applies to the transfer of Open Source software where there is no consideration for the transfer.
- Where we were also concerned initially in regards to our IM services particularly with SharePoint migration and upgrades I researched and found that services regarding data conversion and data migration are considered exempt data processing services and remain non-taxable under the new law so long as the charges are separately stated and set in good faith. This includes data conversion and/or data migration of a customer’s data from the customer’s legacy software to the new system. These data services may include, but are not limited to, formatting data, loading of data, data monitoring, data migration, and data conversion. Data conversion is defined as a process of converting computer data from one format to
However, because of the aforementioned practical application flaws, we have been advocating strongly for the repeal of this legislature. Similarly, in response to push back from the tech community the Governor, the Senate President, Speaker of the House and the Commissioner have all released public statements in support of repealing this new sales tax provision. We applaud the swift action to repeal the tax.