The controversial new state sales tax on computer services in Massachusetts has already gone into effect. Providers of certain computer and software services must now collect a 6.25% sales tax on their work. Yet many people still do not understand which services are now taxable, and which are not. Here is a very basic overview.

The new tax on computer/software services has two components: provisions relating to "modification, integration, enhancement, installation or configuration" of standardized/prewritten software; and provisions relating to computer system design services.

Software modification and customization made to taxable prewritten software is subject to the 6.25% state sales tax. This holds true even if the modification/customization was performed by a separate entity from the original producer, or at a time after the original software was sold and/or installed. For example, integrating an "off the shelf" accounting software system, or installing the latest upgrade to Windows is now a taxable service.

There are certain exemptions, such as software that is used for a qualifying manufacturing process. Modification of open source software is also not taxable. In addition, for custom software production that includes an "inconsequential level" of taxable prewritten software (currently set at less than 10% of the total cost), the modification portion of the project is not taxed.

Many people were concerned that the IT tax would apply to designing and building websites. It does. If a website designer purchases prewritten software that provides a platform to create a website (such as a WordPress template or web design software program like Dreamweaver), the subsequent design and modification of the platform is taxable. Website developers are allowed to separate their "normal" consulting and design services (which are not taxable) from the software modification services, which are taxable.

Computer system design services, which are defined as "the planning, consulting, or designing of computer systems that integrate computer hardware, software, or communications technologies," are subject to the 6.25% sales tax. The cost of actual implementation and installation of system components is not subject to the sales tax.

The new IT tax is extremely complex, and guidance from the Mass. Department of Revenue is still being formulated. We welcome your questions about this tax. Please contact the Gray, Gray & Gray Tax Department at (781) 407-0300.