SalemNews.com, Salem, MA

Business

August 7, 2013

Local IT companies grapple with computer services tax

DANVERS — For John McDougall, the founder of McDougall Interactive Marketing on Cherry Hill Drive, the extension of the sales tax to certain computer software services meant a call to his accountant to see if it applied to his business.

Like a computer virus, the little-known tax was tucked into the recent passage of the state Transportation Finance Bill. The tax went into effect July 31, and some say it has the potential to become a big bug for software companies on the North Shore and elsewhere in the state.

The new tax, according to the state Department of Revenue, extends the 6.25 percent sales tax “to certain services relating to computer system design and to modification, integration, enhancement, installation, or configuration of standardized or prewritten software” for a customer.

Those definitions are broad and ambiguous, some say, and there are complicated rules as to when a sale is taxable and should be collected.

“I think it’s nerve-wracking as a small business,” McDougall said, “and I think businesses are already struggling, why add to that?”

Software sales and licenses have long been taxed. Since 2006, software downloaded from the Internet has also been taxed. According to a memo from the state Department of Revenue, the tax does not extend to a service technician going to a home to determine why a computer is not working. If the technician sells the homeowner software, it would be taxed as it has in the past. But now, the labor to install the new software is also taxable.

“Not all services related to software will be taxable,” said Ann Dufresne, a spokesperson for the Department of Revenue. “The sales and use tax will not apply to personal or professional services that are not directly related to a systems integration project of purchased computer hardware or software.”

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