The Implications of the Software Sales Tax in Massachusetts

A new sales tax on what is known as “software services” just went into effect in Massachusetts.

The tax was included in the larger transportation bill passed by the state legislature. It requires tech firms in the state to collect a 6.25 per cent sales tax on what is being termed “software design services”. The intent is to raise some $160 million annually.

As written in the Boston Globe, The Department of Revenue defines these services as the “modification, integration, enhancement, installation of configuration of standardized or prewritten software.”

This includes such standard items as the modification of off-the-shelf software, program configuration and even the design and development of a website.

Those in the technology industry in Massachusetts had little knowledge that this portion of the bill even existed. Most found out when it became time to start collecting these taxes.

Now state tech firms will have to add this tax to business services and communicate those added charges with clients.

Why is this important?

Massachusetts is known for its high-tech industry. Many leading technology companies spawned their roots in the state and call it home.

The current economic climate, while slowly recovering, is still burdening these firms as they strive to sustain and enhance business growth.

The tax most certainly slows down this process.

First it becomes a revenue problem as tech companies must find ways to compensate for a sudden 6.25% drop in income. These firms will have to decide how to deal with this situation.

This could include passing on a 6.25% increase to customers in what is already a very competitive marketplace, or reducing corporate expenses. Expense reduction may lead to eliminating staff, or cutbacks in hours, plus decreasing wages and benefits. It could also have a negative impact on the recruitment of top technology talent.

Secondly, it requires dozens if not hundreds of non-revenue generating hours educating clients as to the sudden increase in fees. Customers may not understand all the nuances of the tax and why they have to pay for it.

Thirdly, it becomes a large internal bookkeeping problem. Tech firms must start adding this tax to dozens if not thousands of invoices and then ensuring those funds are accounted for in the proper manner.

Perhaps the greatest repercussion will be the potential loss of tech firms to other locales. Some 15 states are reportedly recruiting these firms to relocate to avoid the tax surcharge. Even Florida is said to be making an attempt to lure Massachusetts technology companies to move to the Sunshine state.

Tech companies state-wide are making their distaste for the tax known to legislators. Some efforts to repeal the tax are underway but it could be a while for all the balls to go into motion to get anything done.

While some consumers may be happy to see the tax used as a new way to fund improvements to the transportation system, overall it creates an unfair disadvantage for state firms, slows economic growth, and damages Massachusetts’ reputation as a national hub for technology.

Marc Arbesman is a founder and CIO of ThrottleNet, Inc. ThrottleNet offers an array of technology services and products to help business owners achieve their corporate goals, while reducing overhead. This is accomplished through outsourced Managed Network Services which helps companies improve their technology uptime and IT capabilities while, at the same time, reducing costs. The firm offers custom software development and mobile applications to help companies accelerate their business growth. For additional information contact ThrottleNet online at http://www.throttlenet.com or call 866-826-5966

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