BOSTON — A new Massachusetts sales tax on software and computer services, part of a massive transportation financing plan that became law last month, has been met with anger and confusion in the state’s technology sector, prompting calls for its repeal.
Business leaders brand the measure an “innovation tax” that strikes at the heart of ingenuity in Massachusetts, a pioneering state in the computer industry and still a cradle of cutting-edge entrepreneurship. The tax, which took effect July 31, also has been criticized as being so vague as to leave companies and their accountants scratching their heads over what it applies to while state tax officials scramble to sort it all out.
Two prominent business-backed organizations, the Massachusetts Taxpayers Foundation and the Massachusetts High Technology Council, are leading an initiative petition that urges lawmakers to repeal the tax when they return from summer recess. At least one bill has already been filed that would do so. If the Legislature doesn’t act, opponents will ask voters to kill the tax on next year’s state ballot.
In an Aug. 14 memo to legislators, the council’s president, Christopher Anderson, said the tax threatens to make the state less competitive at a time when tech companies are expected to lead an economic revival.
“We have the highest percentage of tech workers of any state, the largest number of tech clusters, and a highly educated workforce that is second to none. However, none of the states with which Massachusetts most often competes for high tech jobs has a tax like this,” Anderson wrote.
The measure imposes the state’s 6.25 percent sales tax on certain computer system design services and the “modification, integration, enhancement, installation, or configuration of standardized or prewritten software.” It’s unclear if the Democratic-controlled Legislature will revisit the issue.
Sen. Stephen Brewer, D-Barre, chairman of the powerful Senate Ways and Means Committee and one of the principal architects of the transportation finance law, said no decisions had been made.
“I would welcome ideas if people had other alternatives,” said Brewer. “We are not intractable.”
Brewer noted that the tax, originally proposed by Gov. Deval Patrick, is one of several contained in the law that promises $800 million in new revenue for transportation and came in response to concerns from the private sector that the state’s aging infrastructure was stunting economic growth.
The state estimated the tax would generate $161 million in the current fiscal year, but a Massachusetts Taxpayers Foundation analysis concluded that estimate was based on faulty assumptions about the scope of the tax and pegged the actual impact on businesses at about $500 million.
Responding to the criticism, state officials promised to be as “narrow and conservative” as possible in interpreting the tax, said Amy Pitter, commissioner of the Department of Revenue. Acknowledging her agency was relying on “tax lawyers, not computer programmers,” Pitter invited industry representatives to participate in focus groups and share their concerns.
The department issued new guidance last week seeking to clarify aspects of the tax, though it remains a complex patchwork of rules.
For example, customized software that incorporates prewritten software would be taxable, unless the extent of the prewritten material was “inconsequential.” A plug-in that helps create a customized version of a product, such as an Excel spreadsheet, would be taxed. But enhancements made to open source software, generally free and downloadable from the Internet, would be exempt.
The revisions did not appear to be softening opposition to the tax, especially among smaller software services firms that say they’ll be hurt the most.
“It’s a very bad law,” said Andy Singleton, founder and chief executive of Assembla, a 7-year-old Needham company that makes Web-based software. “They can’t narrow it to the point where it makes sense. It’s written to apply to almost anything that a computer programmer does.”
The tax could prompt firms to shed jobs or produce more work outside of Massachusetts, Singleton says. Many of Assembla’s 40 employees already work outside the state or even the U.S., using an online platform to share tasks.
State officials dispute critics’ assertion that the levy is unique, saying most states tax information technology in one form or another. But opponents maintain that only four other states tax computer and software services, all at a lower rate than Massachusetts.