Research & Commentary: Massachusetts Computer and Software Service Tax

Published September 25, 2013

Massachusetts has had great success in recent years developing a burgeoning technology market, employing thousands across the state. Massachusetts is competing with other states across the country to attract new or existing technology companies and the jobs and tax revenue they create.

Unfortunately, in an effort to raise new funds to improve the state’s transportation system, the Massachusetts legislature recently passed a law expanding the state’s existing 6.5 percent sales tax to computer and software services, including custom software and network design services. The new tech tax, which went into effect July 31 of this year, is expected to generate about $161 million in state revenue.

The response from the state’s technology industry was swift and overwhelmingly negative. Critics of the tech tax argue it will affect nearly every industry in the state because virtually all businesses utilize outside companies to modify existing standardized computer programs to meet their individual needs. The tax will increase the cost of expansion, development, and modernization for any number of industries, ranging from high-tech biotechnology firms to manufacturing and retail.

Only four other states have implemented such a tax, and all charge a much lower rate. A recent study from the Massachusetts Taxpayers Foundation found the new tax is the highest of its kind in the nation and many of the other states competing for new tech companies are moving in the opposite direction by offering tax incentives to attract new businesses. The tax will cost Massachusetts employers an additional $500 million in annual sales taxes and generate additional costs through myriad new regulations and legal cases as courts decide which products and services are taxable.

Tech companies are most often attracted to states with a well-educated population from which to draw talented programmers and developers and a tax system that allows them to make a profit and grow their businesses. Lawmakers should focus on promoting tax policies that encourage new businesses to enter the state, not drive them away.

The following documents provide more information on taxes and telecom policy.

Ten Principles of Telecom Policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder examine the results of telecom reform in Indiana, the advances made by other innovation leaders in the telecom market, and how other states can follow their lead to reap the rewards of new investment in telecommunications services. 

Eight Principles of Telecommunications Policy
The Washington Policy Center lays out a basic framework for how legislators and citizens can incorporate many of the basic free-market principles used in discussions of budgets and taxes, education, health care, and the environment, and apply them to debates over technology and telecommunications policy. 

New Computer and Software Services Tax Most Burdensome in the Nation
This comprehensive 50-state analysis from the Massachusetts Taxpayers Foundation shows the recently enacted software services tax is the most burdensome in the nation. An Excel file allows users to compare Massachusetts to 49 other states on the tax treatment of 11 different categories of computer and software services. 

Research & Commentary: Taxing Cloud Computing
Cloud computing has fundamentally changed how consumers purchase and use software and computing services by moving many of the functions online. Matthew Glans of The Heartland Institute argues state legislators should avoid placing new, burdensome taxes on cloud computing and abide by the physical presence standard. Otherwise, cloud service providers will be discouraged from setting up shop in-state or providing these services there. 

Massachusetts Computer Software Services Tax Attacked
Writing in Tax News, Leroy Baker discusses the Massachusetts Taxpayers Foundation’s 50-state analysis of Massachusetts’ computer and software services tax, stating the law “strikes at the heart of the innovation economy that is central to the state’s economic future.” 

Governor Patrick’s Tech Tax Wakes up a Sleeping Giant
Writing in the Boston Globe, Joan Vennochi reports on the backlash from the technology sector over the state’s new computer and software services tax. 

Business and Technology Leaders United against New Tax on Innovation; File Ballot Petition for Repeal
This press release outlines an effort by a coalition of business and technology groups to file an initiative petition to repeal the legislation creating the Massachusetts tech tax. 

Massachusetts Enacts Sales Tax on ‘Pre-Written’ Software
Rob Marvin of Software Development Times discusses the expected effect the Massachusetts computer and software services tax will have on software developers. 

Proposed Sales Tax on Computer and Data Processing and Custom Software Opens Pandora’s Box
This bulletin from the Massachusetts Taxpayers Foundation, released before the bill’s passage, argues the proposal to tax computer and data processing services and custom software is a “Pandora’s box, raising numerous problems for virtually all businesses in the state, large and small, and seriously undercutting the state’s competitiveness.” 

Custom Software and Network Design Services Tax Q & A
The Massachusetts High Technology Council explains why the custom software and network design services tax emerged and why it is a bad idea for Massachusetts. 

New Massachusetts Software Services Tax Highest in Nation
Sarah Kuranda explains how the new software and network design taxes in Massachusetts compare to similar taxes in other states.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Tech News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].