The Reality Of Software Service Tax

A new state law went into effect in Massachusetts that requires businesses offering IT services to charge a 6.25 percent sales tax. The goal of adding this tax to software services was attempt by the state to collect funds for public transportation.

The intent of the tax was to only have a moderate effect on the businesses required to pay the tax in order to resolve the state’s transportation needs. However, software developers, web designers and IT consultants are now scrambling to get their businesses to be in compliance with the law as their financials concerns regarding the tax begin to grow.

First Time Charging Sales Tax

Small companies handling IT and software services have never had to charge sales tax in the past and many of them are unfamiliar with the process. The law itself has made things even more confusing for small business owners who must charge taxes for certain services but not for others. Trying to understand the details of the law has already proven to be a headache for these companies which must rearrange their administrative process to accommodate the new tax.

According to the law, services such as website hosting, data storage and disaster recovery are not considered taxable. The services which are required as taxable are not clearly defined enough for many of these companies to start organizing the changes that need to be made. They are concerned that their customers may struggle to understand these taxes if the owners are confused themselves.

A Negative Influence 

The impact of the software service tax will not only be in the way these companies do business but it could also have a negative influence on their profit and ability to compete in the market. Many of the IT companies that must comply with the law are relatively small businesses that would potentially lose a lot of customers if they are required to charge a 6.25 percent tax of their services.

With the additional cost for their service, the customers could just as easily seek assistance from companies out of state and save several hundred dollars. These small Massachusetts companies will be struggling to compete with businesses that consistently have lower prices because they are not required to charge any sales tax for their services. Many are worried that these kind of dramatic change could slow down their company significantly or even put them out of business.

Must Comply 

Regardless of their fears about the new tax, it is too late for these companies to do anything but comply with the law the best that they can. The legislators who designed this law were probably not aware of the negative impact it would have on IT businesses and how frustrating it would be for them to get up to speed with the tax.

If the tax could be more limited in the future and only target a few, more specific services then it could be easier on the companies who are affected by it. Since it was only recently passed on July 31, it remains to be seen whether the law will eventually be altered in any way or how much it will really affect these businesses.

Leo Hart has a passion for the computing industry from his time working with Custom Cloud helping people with their customized virtual server setup, learn more here.