The tech-tax monster vs. Beacon Hill

Michael Widmer, the usually mild-mannered president of the Massachusetts Taxpayers Foundation, is as alarmed as I can ever remember him being. If it becomes law, he says, the transportation bill that the Legislature passed on Wednesday would require the Department of Revenue to tax a sweeping range of computer services that state firms purchase to stay competitive.

Given the high-tech state of the Massachusetts economy, that big new tax would have large negative consequences.

“It’s a tsunami,” he says. “Any company that invests in new technology to upgrade its system will be taxed.”

The Patrick administration, which put forward a variant of that plan as part of its proposal to raise transportation money, originally estimated the effects at about $370 million per year. In reworking Patrick’s plan, the Legislature meant to scale it back to $160 million. But the way the final legislation is worded, Widmer says, the added annual burden is more likely to be $500 million.

Mind you, this is not about taxing software products that are sold in boxes or downloaded from vendors; those products are already taxed. This provision would extend the state sales tax to all of the computer services, IT work, or website developments or upgrades that companies hire third-party vendors to do for them.

For example, computer systems developed or upgraded to manage sales and inventory and improve customer services would be taxed.

So would banks’ investment in better online and mobile banking. What’s more, the cost of developing the new web portals that health plans must build for their customers under last year’s health care cost-containment legislation will be taxed, making it harder to rein in premiums.

Widmer says that Staples, the Massachusetts-based office-supply company, would see its sales tax bill rise by some $10 million a year. Only three other states — New Mexico, Hawaii, and South Dakota — have such a broad tax on computer services.

The new tax is a big concern because it would slap businesses with significant new expenses for making the investments needed to stay on the cutting edge in the digital age. Indeed, the foundation estimates that the new levy alone would amount to a 30 percent increase in the state sales taxes Massachusetts firms pay.

The foundation’s analysis carries significant weight on Beacon Hill; House Ways and Means Chairman Brian Dempsey, who says the sales-tax extension isn’t intended to be that broad, says the House is willing to work with Widmer and the business community to fix it.

But the problem is compounded by a nascent standoff between Patrick and the Legislature. The governor wanted more transportation spending supported principally by a hike in the state income tax. The Legislature passed a smaller transportation plan backed by increases in the gas, corporate, and cigarette taxes.

Patrick, who is in California visiting family, issued a statement asserting that the Legislature’s plan doesn’t provide enough future funding and saying that he will send it back with an amendment. That amendment will supposedly stipulate that tolls on the western part of the turnpike, currently scheduled to expire in 2017, will be retained. Because that wasn’t in the governor’s original plan, the feeling among legislators is that Patrick is doing some posturing at their expense. Further, adding such a provision at this late juncture would create significant process problems for legislative leadership.

One can see this standoff moving in one of two directions. The governor and legislative leaders could dig in. Patrick could file his amendment; the Legislature could reject it; he could then veto the legislation, and they could likely override that veto.

That route would have two unfortunate results: 1) The new tech tax would take effect, and 2) the battle would set an antagonistic tone for the last year and a half of Patrick’s term.

Or the governor, Widmer, and legislative leaders could sit down and hammer out a way forward. That might, say, result in Patrick’s signing this bill with the understanding that corrective legislation would soon follow.

That would be the sensible way forward. But that’s not always the favored way — not on Beacon Hill anyway.