Mass. ‘tech tax’ could hit N.H. businesses
Granite State high-tech firms with customers south of the border may unknowingly be covered by the tax
Two big changes in Massachusetts’ business taxes – one already in effect and another on the horizon – could reach into the pockets of New Hampshire companies that do business south of the border.
The first is a 6.25 percent sales tax on computer and software technology services that went into effect on July 31. The other is a broader shift in Bay State business taxes that could affect all service businesses starting next year, forcing some to even pay a personal income tax.
The so-called “tech tax” – an extension of the Massachusetts sales – is a hot topic in Boston and the high-tech corridor surrounding it. The Massachusetts Taxpayers Foundation has called it the “most onerous computer and software services tax in the nation.” Last week, the Mass High Tech Council joined a petition effort to repeal the tax with a measure on the state’s November ballot. The Boston Herald reports that most Boston mayoral candidates denounced it.
Few companies in New Hampshire have heard about it, and those that have might be chortling, figuring it is just one more example of “Taxachusetts” sending businesses and customers into the tax-free Granite State. But those high-tech businesses with customers south of the border may unknowingly be incurring the tech tax right now.
In fact, those who never filed a Massachusetts return might wake up to a “compliance nightmare” at the end of the quarter, warned Kathryn Michaelis, a tax specialist and shareholder at the Concord-based law firm of Rath, Young & Pignatelli.
Three requirements could result in a New Hampshire company getting stuck with the tech tax tab, explained Michaelis. All of them must be met:
• The business must have a physical presence in Massachusetts. That doesn’t mean it has to have an office there – a sales rep working out of his or her Massachusetts home may be enough if “Massachusetts takes the position to impose the tax,” Michaelis said. While the business might challenge such an audit, it might save time and money to hire reps out of Salem and Nashua, when possible, she said.
• The services provided have to be covered by the tax. That’s either “computer system design services” – defined as “the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party” – or “software modification services” – “the modification, integration, enhancement, installation or configuration of standardized software.”
(If those definitions don’t clarify things for you, you aren’t alone. That’s why the Massachusetts Department of Revenue is posting rules explaining the language. Even now, it’s not clear whether the tax covers website design or even data processing.)
• The transaction has to be “sourced” in Massachusetts. This is a very complicated four-tiered test. If purchasers receive the services in New Hampshire, then Massachusetts can’t touch it. But if it is delivered at the purchaser’s place of business, then Massachusetts can tax it. If it isn’t known, then the business must go by the credit card receipt, or it defaults to the Massachusetts address.
Businesses that sell to Massachusetts aren’t the only ones that might be affected. Those that buy from across the border might face higher prices, as Massachusetts companies pass the sales tax along to customers. Of course, that might give high-tech companies in New Hampshire the same kind of competitive advantage that border convenience stores have, for example.
Sourcing is also the issue in Massachusetts new income tax law, which was passed at the same time as the tech tax but won’t go into effect until Jan. 1, 2014.
The law covers all service employees, including law firms, accounting firms, software and tech firms, construction firms, engineering firms and architectural firms.
The old rule sourced income to the state where the business performed the work. The new rule sources income to the state where the customer is located.
There could be some advantage to this. Massachusetts’ corporate income tax is lower (8 percent) than New Hampshire’s 8.5 percent business profits tax, and the personal income tax (for sole proprietorships and other pass-through corporations) is even lower, at 5.25 percent – though the idea of a Granite Stater paying a Massachusetts income tax without crossing the border might be a tough pill to swallow.
Besides, that same income could be sourced twice and be subject to both taxes.
Still, like the tech tax, this might cause some firms to shun Massachusetts and look to its neighbor to the north. So while these tax changes might be bad for some New Hampshire companies, they might benefit the state as a whole.
As Michaelis said, “pretty soon the compliance burden outweighs the benefits of doing business in the state.”