Businesses shouldn’t be required to guess what they must pay taxes on. Yet that’s exactly where Massachusetts’ software-services industry finds itself several weeks after state legislators passed a bill to put a 6.25 percent sales tax on “computer system design services” to fund transportation projects. But implementation of the so-called “tech tax” isn’t the problem. It’s the irresponsible policymaking that underlies it that is now jeopardizing one of the state’s fastest-growing sectors. Opponents are filing a 2014 ballot initiative to repeal the levy. Legislators, however, should step in to provide a faster fix.
Tax officials, for their part, have made a valiant effort to inform businesses about the new tax and how to collect it: When the bill containing the levy passed in mid-July, guidance on its implementation was available the same day. The Department of Revenue’s website features 44 frequently asked questions and potential scenarios, and customer-service agents have been trained to answer additional queries via a hotline and email. Regular forums will soon start to provide one-on-one advice. Nonetheless, companies are still scrambling to figure out what, if anything, they owe.
Meanwhile, the question remains as to why lawmakers chose to fund transportation improvements with a technology tax in the first place. Raising the gas tax by an additional 5 cents — which would yield roughly the same amount of revenues as the tech tax is projected to produce — would have been a more sensible approach. The Legislature made matters worse by not seeking any public comments before passing the bill. Critics argue that the state’s projection that the tax will raise $160 million could be wildly off. Given the law’s ambiguous language, corporate technology users — the state’s largest employers and promising start-ups alike — may pay as much as $500 million in additional taxes, according to the Massachusetts Taxpayers Foundation. Amy Pitter, the state’s tax commissioner, stands by her agency’s original analysis, and says she plans to interpret the law as narrowly as possible.
Even so, Massachusetts now has the highest tax on computer and software services in the country. Just three other states tax such services, and none at more than 4 percent. For most Bay State firms, particularly small businesses, their only choice will be to pass the added cost along to customers. This complicated process will almost guarantee Massachusetts’ high-tech companies will lose business to out-of-state competitors. That’s an especially foolish move for a state that values its innovation economy.
Pitter anticipates the tech tax will need technical corrections. Better yet, lawmakers should scrap it altogether.