Massachusetts Introduces Software Service Tax

I'll say this as the owner of a small consultancy that will (probably) be affected by the new law: I have far less objection to the tax itself than the specifics of how it's implemented. In any case, it might first be worthwhile to read the actual language in question [1].

So with that in mind, the implementation problems include:

1) There was very little notice given to the affected parties - the bill passed July 24, effective July 31. (This is somewhat unavoidable, since part of the stated purpose of the tax is to fund transportation projects in 2013 - so delaying its effects would be counterproductive to the underlying goal).

2) There's still quite a bit of ambiguity surrounding implementation, including - crucially - what's taxable and what isn't. MA DOR (the state's version of the IRS) has issued some FAQs [2] and clarifications - which, annoyance aside, have actually been helpful. However, they only begin to answer the very real questions that this presents for many businesses - but we're responsible for collecting the tax basically yesterday (first filing due September 20, to cover taxes starting August 1). I read today that DOR will issue additional clarification and guidance in October... which I can only assume will be retroactive. So we'll likely be forced to either charge some people an unnecessary tax, or take an unexpected 6% revenue cut, or possibly end up having to pay penalties. Merits of the tax aside, the uncertainty - inevitable with such a new rule! - is what's killer.

3) Broadly speaking, the distinction they're trying to draw in the law does seem a bit weird. As I understand it (and IANAL, but have talked to a few - all of whom are still trying to parse what this means), if I write a custom CMS "from scratch", that's still considered a tax-free service. If I train you on, say, Wordpress (or any open-source or commercial product, really), that's still tax-free as well. If, however, I build a plugin to integrate Wordpress with your in-house SSO system - that's taxable. A custom theme? Probably.

Where do frameworks fit in? (Say, if I write you a shiny, custom CMS in Django). I don't know. There's a specific clarification issued by DOR that operating systems are exempt - or rather, to quote directly: "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 are some interesting caveats being carved out - for example: "Suppose a computer system is designed but not actually built, so software is never actually integrated with hardware. Are the services still subject to sales tax? No."

Again, while on the whole I'd of course prefer that this tax go away entirely, at the end of the day it's no more or less rational than the taxation (or non-taxation) of many other goods and services. The critical problem here is the implementation, which introduces a whole lot of uncertainty and risk into a business that, until a few days ago, has never had to deal with this sort of thing.

[1] http://www.mass.gov/dor/businesses/help-and-resources/legal-...

[2] http://www.mass.gov/dor/docs/dor/law-changes/faqss-computer-...

Professional services taxes similar to sales taxes are not unheard of, nor are gross receipts taxes that vary based on what kind of business you're in. There are as many tax systems as there are tax jurisdictions.

The problem here is somebody wrote a "services tax" without the first clue what they were actually doing. It's like intending to impose a new cigarette tax, but writing it such that anything which burns might fall under the definition of cigarette.

Also, the main point is that they're not following the spirit of the law. The primary value is the software, but they're under-charging for it and over-charging for related services in order to avoid taxation on the true value of the software. That's what someone was ham-fistedly trying to fix.

I bought a new kitchen countertop through Lowes a few months ago, and this is exactly what they did. The countertop is priced by the square foot, but they write up the total cost as labor so that they don't have to charge sales tax.

It certainly was at the time.

Its a value added tax, so no, 13% doesn't get taxed every time money changes hands. Only the added value.