The state expects the tax to bring in about $161 million, but the nonprofit Massachusetts Taxpayers Foundation estimates it could wind up vacuuming up $500 million. Some in the IT industry say that number could actually reach $1 billion, said Andrew Bagley, the foundation’s director of research and public affairs.
State Sen. Joan Lovely said the tax was part of a compromise between the governor’s $2 billion tax plan and the Legislature’s more modest plan to fix the state’s transportation infrastructure, which also raised taxes on gas and cigarettes. The intent, Lovely said, “is not to raise any more than” the tax was intended to raise.
“If it’s more than that, the Legislature vows to revisit it,” Lovely said.
While the sales tax does not cover all software services, such as training, it is broad enough that it is hard to tell when certain services may or may not be taxed. According to the state Department of Revenue, if a website designer is modifying prewritten software for a customer, the job is taxed. But if the designer creates custom software for a customer, that job is not taxed. Website hosting, data storage and disaster recovery and backup services are also not being taxed.
“This is confusing to me,” McDougall said. “That is the frustrating thing for a business owner. Now do I have to go and look into maybe not a website design but who knows if that is even on the table?”
Generally, a vendor should collect the new tax when the purchaser is a customer in Massachusetts, but because software companies do business all over, this too can be a source of confusion.
Michael Widmer, president of the Massachusetts Taxpayers Foundation, said his group tried to warn legislative leaders of the enormity of the bill back in May, “but they did not respond.”