A change in Massachusetts' tax law will mean some New Hampshire businesses will be required to pay an 8 percent corporate income tax to the Bay State on that portion of their business devoted to Massachusetts customers.
"Our concern is a lot of businesses don't know that," said Kathryn Michaelis, an attorney in the tax practice group at the Rath, Young and Pignatelli law firm in Concord.
Sole proprietors and partnerships also may be required to pay Massachusetts personal income tax because those entities are not subject to corporate income tax, Michaelis said. The personal income tax rate is 5.2 percent.
Michaelis advised business owners to talk to a financial expert to see how the law might apply to them because some companies may need to make changes to their record-keeping to comply and calculate what tax they owe.
Neither New Hampshire nor Massachusetts revenue officials could say how many New Hampshire businesses are affected or estimate how much more money Granite State businesses will pay to Massachusetts this tax year.
The law, which took effect Jan. 1, changes the way that Massachusetts considers certain income derived from Massachusetts customers for the purpose of calculating income taxes.
It applies to any service-based business that has Massachusetts customers, such as law firms, medical and dental service providers and consulting businesses, according to Michaelis. It also affects some businesses that sell certain intangible assets used in Massachusetts, such as the licensing of certain software.
Those companies now must pay the 8 percent tax on the revenue derived from those Massachusetts clients, Michaelis said. In prior years, a New Hampshire company's revenues collected from Massachusetts would be used to calculate the business profits tax owed to New Hampshire.
Now, with the new Massachusetts law, companies still must count all of its revenues for the purpose of calculating their New Hampshire business profits tax, but some of those same revenues also are counted and taxed by Massachusetts this year, Michaelis said.
"Anything owed in Massachusetts is a net increase" for a business, said Chris Sullivan, an attorney at the Concord law firm.
In the past, a Salem architect doing work on a North Andover, Mass., school project would report all revenues to New Hampshire and none to Massachusetts. Now, that project's revenues to the architect would be subject to Bay State tax.
The Concord lawyers said it is difficult to provide an easy example of how much tax a company might owe based on revenue assumptions because the tax laws are complex. Deductions are allowed, and other financial information also is factored into calculating any tax.
But New Hampshire's treasury won't be hurt from the Massachusetts law.
The tax change "should not affect application of the New Hampshire Business Profits Tax (BPT) law or the collection of BPT revenue," said Melinda Cyr, tax policy analyst with the New Hampshire Department of Revenue.
The Massachusetts Department of Revenue said in an email that the law would bring in $21 million between Jan. 1 and June 30, 2014, and another $36 million for fiscal year 2015. The calculations are not broken out by state, a spokeswoman said.
Michaelis said many Granite State businesses will need to track how much revenue they get from Massachusetts customers in order to comply with the law.
Matt Cookson, executive director with the New Hampshire High Tech Council, said, "I think a lot of people are not aware of this" and may not think they owe Massachusetts taxes.
Asked whether this will cause some New Hampshire businesses to stop doing business in Massachusetts, Cookson said businesses will need to do their own calculations.
"I suppose that's a case-by-case basis. Once a business fully understands the impact, they'll have to weigh their profit margin versus the tax impact and determine whether it's still viable to do that kind of work or potentially raise their rates to cover the tax."