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Software, design tax plan for Mass. draws fire

Business group offers amendment to limit state levy

The Massachusetts Taxpayers Foundation wants state legislators to revise a proposed broad new tax on computer design and software services that Governor Deval Patrick would use to pay for transportation improvements.

The business group said it will ask lawmakers to limit the types of computer and software services that would be subject to the state’s 6.25 percent sales tax. As written, the proposed tax is so vague it would include all types of computer-related transactions and would end up generating significantly more than the $160 million a year estimated by the state Legislature, business leaders said.

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The amendment offered by the Taxpayers Foundation would not apply the sales tax to custom software or enhancements to standard software programs used by businesses. If levied, the tax could cost large corporations as much as tens of thousands of dollars or more in additional payments, according to the foundation.

Initially passed in late June, the transportation funding bill was sent back to the Legislature by Patrick, who said it did not provide enough new revenue to finance the $800 million he says is needed for all the transportation projects before the state. Patrick asked lawmakers to increase the gas tax, but they were quick to voice opposition to the recommendation and are expected to vote on the amended bill next week.

“There’s now an opportunity to get the software thing fixed,” said Andrew Bagley, director of research at the Massachusetts Taxpayers Foundation, a nonprofit policy group in Boston. “It’s a huge hit on a whole range of companies.”

The governor did not suggest changes to the computer tax in the bill.

Depending on how tax regulators interpret the legislation, it could mean that businesses will have to pay sales tax on a range of services, including large-scale computer systems improvements, Web design services, and the hiring of third-party vendors to customize off-the-shelf computer programs.

The Patrick administration declined to comment on the Taxpayers Foundation proposal, but did say the Massachusetts business community should contribute to fixing the state’s transportation needs.

“We do not agree that applying sales taxes to software services is a threat to our innovation economy,” said Alex Zaroulis, a spokeswoman for the Patrick administration. “The administration has an unprecedented record of helping high-tech companies and entrepreneurs create jobs and move ideas into the marketplace.”

She added that the Patrick administration will carefully enact the taxes and businesses will have an opportunity to give feedback.

“If there are unintended consequences, we would work with the Legislature to address them.”

Even though the Legislature and Patrick remain at odds over the transportation finance bill, some form of the software tax is expected to be included if a finance bill becomes law.

That could have a chilling effect on the state’s growing technology sector, said Senator Robert Hedlund, a Republican from Weymouth, who plans to vote against the bill when it is taken up by the Senate.

“That’s one sector that we’re really competitive in,” he said. “We just made ourselves hugely uncompetitive.”

Michael B. Farrell can be reached at michael.farrell@globe.com.

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