A bill recently approved by state lawmakers increased taxes on gas and tobacco in Massachusetts, effective July 31. But the bill also introduced a confounding addition to the sales tax: computer software-based transactions.
Though even the state department of revenue is still in the process of figuring out exactly what will be taxed through the legislation, the department published a list of “frequently asked questions” in an attempt to shed some light on a new piece to the tax code.
The nine-page document lists 44 questions and corresponding answers. Here are a few notes on the new law:
Labor will be taxed now where it was not before, see question 7:
7. We are a computer service and IT support company located in Massachusetts. We occasionally install Microsoft Office and operating system software into computers for our customers. We purchase the software and tax the end user but do not tax the labor for installing the software into the computer. Are you saying with this new law, we charge tax on the software and labor as well?
A. Yes, that is correct, both the taxable prewritten software and installation charges are subject to tax on and after July 31, 2013.
The use of open source, or free on the internet, software can be taxed, only if modified or customized, see questions 10 and 11:
9. How does the new tax apply to use of Open Source software?
A. 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. If a seller customizes Open Source software and sells it to one or more customers to be used on any electronic device, that customized software is subject to tax.
10. Is Website Design a taxable service?
A. The Department understands that website design may be accomplished in various ways. If the website designer is configuring or modifying Open Source (free) code or other prewritten software for the needs of a customer, the designer’s charges to that customer are subject to tax. If the website designer is creating custom software for its customer (that is, not based on other prewritten software), then the charges are not taxable. See definition of prewritten software in question #1 and description of taxable modifications to prewritten software in question #2.
The department of revenue is asking those with questions to email firstname.lastname@example.org, the department will update the document with specifics as they come in.