Massachusetts has introduced a major change to its corporate tax code that impacts software developers. The Massachusetts Department of Revenue’s Technical Information Release (TIR) 23-8 now classifies computer software developers as manufacturing companies for corporate excise tax purposes. Companies that develop and sell access to software allowing customers to input information, manipulate the software, and run reports independently are now considered sellers of tangible personal property. Consequently, these companies must use a single-sales factor method of apportionment for their corporate excise tax returns, rather than the traditional three-factor method that includes property, payroll, and sales.
This change follows the Massachusetts Appellate Tax Board’s 2021 ruling in Akamai Technologies, Inc. v. Commissioner of Revenue. The board determined that Akamai Technologies qualifies as a manufacturing corporation due to its revenue from developing and selling standardized computer software accessed remotely. As a result, software developers involved in creating and selling standardized computer software, whether downloaded or accessed via the cloud, should review their corporate excise tax returns to ensure they are using the correct apportionment method.
Businesses engaged in qualified manufacturing activities in Massachusetts can take advantage of several tax benefits, including:
- Favorable Corporate Income Tax Apportionment
- Significant Tax Credits
- Sales Tax Exemptions
- Local Property Tax Exemptions
- Eligibility Criteria
A business performing substantial manufacturing activities within the state could qualify for state manufacturing tax benefits if it meets any one of the following criteria:
- Derives 25% of its receipts from products manufactured in Massachusetts.
- Has one-quarter of its payroll comprised of Massachusetts employees performing manufacturing activities and derives 15% of its receipts from products made in the state.
- Has 25% of its Massachusetts property value associated with tangible property used in the manufacturing process and derives 15% of its receipts from products made in the state.
- Has 35% of its Massachusetts property value associated with tangible property used in the manufacturing process.
Massachusetts law continues to evolve, potentially allowing more businesses to qualify for manufacturing corporation status. Companies may be entitled to significant state tax benefits and refunds for taxes paid in prior years. Leyton experts are ready to provide guidance and support to your business by reviewing your in-state activities and determining if it qualifies for these benefits.
