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New tax results in confusion in Massachusetts

Business owners in Massachusetts may have heard about a controversial new tax law. A 6.25 percent sales tax may apply to software or computer services that are not 100 percent proprietary. Many have expressed confusion about the new tax, as well as opposition to it. Those that sell software complain that the tax code is vague about what software or services are or are not to be taxed.

The new tax went into effect on July 31 as part of a plan to raise revenue for transportation infrastructure. Estimates of expected revenue vary considerably. Some estimates are as low as $160 million and some as high as $500 million. The intent of the law does not seem to be to discourage innovation, but that is what critics claim it will do. It may result in tax court litigation for software firms.

If a firm in Massachusetts sells software or computer services that it originally designed, the revenue will not be subject to the tax. However, if the software or service incorporates other software, such as a custom-tailored plugin that modifies an Excel spreadsheet, the tax may apply unless the off-the-shelf software is deemed "insignificant" as a proportion of the overall package. Confusion lies in what tax officials and courts will consider significant or not. Critics claim that any incorporation of outside software in a package or service will be considered significant and therefore subject to the tax.

It is important for any vendor of software or computer related services to contact a qualified tax attorney. A tax attorney who is knowledgeable about the law as well as technology can help ensure that entrepreneurs comply with state and federal tax laws that apply to proprietary software.

Source: Sun Herald, "New Mass. sales tax angers, confuses tech firms", Bob Salsberg, August 25, 2013

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