If you buy or sell software or computer services that are used by anyone in Massachusetts, your life just got a lot harder. The State of Massachusetts has recently increased taxes on gas, cigarettes… and software . This tax applies to all “computer software, including pre-written upgrades, which is not designed and developed by the author.” Vague and scary, right? Well, if you don’t want to be nabbed for tax evasion, here’s what you have to know.

Anyone working in the IT industry who sells software or related services to any business that has any office in Massachusetts.

Any company that has software “used” in Massachusetts (internal software or external software presumably) and who doesn’t do ALL of their own IT work.

It’s crazy, isn’t it? There’s already a petition on Change.org for repeal, and rumor has it the law will likely be amended, but in the meantime you should pay taxes for worse-case scenario.

Immediately. This law went into effect a couple of weeks ago, and so starting July 31st, 2013, any contractors, freelancers or IT shops need to start charging their clients tax if their software is “used” in Massachusetts. If you’re not set up to collect Massachusetts sales tax, you might want to talk to your accountant now.

“I spoke to my representative a little while ago and they confirmed that likely some percentage of work we do would be taxable and some wouldn’t be. I explained that there is no way for our techs to separate out one from the other in our current ticketing system and even if there was, I couldn’t even train them how to do it fast enough.” —Delcie Bean CEO Paragus Strategic IT

This affects a lot of software vendors whose customers use Google Apps; if they have a customer rolling out Google Apps across an industry, and they need help “customizing” or “updating” anything, the freelancers and web design shops that get this cottage industry business will now be taxed.

This added levy is not only cumbersome, it’s super confusing. For example:

if you install software (Microsoft Office, Constant Contact, Drupal, etc.), it’s taxable

if your client clicks the mouse to install it, it’s not taxable

training your client to use this software is not taxable

but if you “customize” or configure the software in any way, it’s taxable

if you don’t actually make any changes, but just discuss them and plan them, it’s consulting and not taxable

if you create graphic design mockups, it’s not taxable

but as soon as you implement that design (i.e. program it), it becomes taxable if you’re using “prewritten” software “not developed” by you (such as WordPress)

At least, that’s how we think it works. What it definitely means is that IT businesses in Massachusetts are going to take a hit. We’ve got a lot more paperwork and a lot of nuances to work out now; for instance, we lease a server and resell portions of it to our clients. The hosting costs include security patches, so some percentage of our hosting costs is taxable, even “hosting” isn’t taxable and our server isn’t in Massachusetts.

And what do you do if someone prepays for 100 hours of work that has not yet been defined? How much is going to be taxable? It seems you can’t accept their money without also collecting sales tax preemptively, regardless of whether sales tax will actually apply. And, according to the Mass Department of Revenue (DOR), you should just overtax instead of undertax if you want to avoid fees. Great.