Massachusetts Governor Proposes Tax On Computer Services

Under the proposal, a tax of 4.5 percent would be levied against certain offerings in hopes of generating approximately $265 million in additional revenue.

"This is partly intended to clarify the boundary line between what counts as a taxable product under Massachusetts law," said David Sullivan, general counsel for the Massachusetts Department of Administration and Finance. "For example, if you buy a computer package off the shelf, that's currently taxable, but if you purchase a service, such as modification of an existing program, that's not currently taxable. Many of these offerings are partly products and partly services, so we're trying to figure out where to draw the line in terms of what should be taxed. In the proposed legislation, much of this has been resolved in favor of taxation."

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The move is aimed primarily at business-to-business transactions, and Sullivan added that consumer offerings, such as music on iTunes and books on Kindle, are not currently being targeted for taxation.

Sullivan refused to address the specific issue of whether services frequently provided by the channel would be subject to tax, but text from the proposed legislation provided by the Massachusetts Department of Revenue defines the terms as follows:

"Computer and data processing services [are] services that include but are not limited to programming, code writing, modification or testing of existing programs, feasibility studies and design and installation of computer systems that integrate computer hardware, software, and communication technologies, whether or not such services are rendered in connection with the development, creation or production of standardized or custom software, provision of access to software or the storage of data on the seller's or a third party's server including disaster recovery services, and bundled charges where the value of computer and data processing services is the predominant portion of the bundle and regardless of whether any report that is furnished or made available is unique to a particular customer."

Department of Revenue spokesperson Anne DuFresne pointed out that the emphasis is at least partly on integrated systems that are then customized for the customer, al though she added that in many respects, Commonwealth officials are still in the process of defining exactly which functions would be taxed and which would not.

"The Department of Revenue is going to have to write some guidance on this," she said. "We have to define customization and other terms. There's a real fine line between what will be taxed and what will not be taxed. We have to figure out what is a service and what is software, and over time the line has gotten very blurry. We ourselves are trying to figure out a lot of the finer points."

PUBLISHED MARCH 18, 2013