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(NECN: Peter Howe, Boston) - It’s no cliché to say computers and software run our workplaces and our world these days, so when Massachusetts legislators went looking to raise money for transportation, they chose earlier this month to add a tax on computer and software services.
As legislative leaders and state Revenue Department analysts told it, the measure would generate $161 million a year, barely 0.5 percent of what the state government spends annually, by extending the 6.25 percent state sales tax businesses pay on computer equipment and software to also be levied on what for-profit businesses pay information technology consultants to customize the software or configure the company.
Legislators say their intent is a logical, limited extension of an existing tax on a product – software and computers - to cover the costs associated with customizing and deploying those by the buyer. The tax is set to take effect rapidly, next Wednesday, July 31.
But following the issuance late Thursday of a “technical information release” by the Revenue Commissioner Amy Pitter on what will be taxed and how, business leaders from the Massachusetts Taxpayers Foundation and Massachusetts High-Technology Council are warning the tax could be devastating, extracting several times more revenue than legislators have predicted.
"This is the most far-reaching software services tax in the nation," Taxpayers Foundation president Michael J. Widmer said Friday.
His group has been warning that what legislators called a $161 million tax was potentially much more like a $500 million hit because software and computer services are so pervasive throughout the Massachusetts economy.
"Further digging we've done, we now think the $500 million is a floor. I think it could be more than that, because of the broad, comprehensive nature of the tax," Widmer said. "This tax is, in fact, going to cost a lot of jobs for Massachusetts."
Late Thursday, the Legislature’s two Ways and Means Committee chairmen, Senator Stephen M. Brewer (D-Barre) and Rep. Brian S. Dempsey (D-Haverhill), wrote Pitter, stressing that the law is meant to add sales tax only to two specific Census Bureau/North American Industry Classification System categories of business spending on computer services and software services.
"Should the revenue or job impacts be greater than anticipated, or if the tax is imposed on vendors not intended, we will not hesitate to revisit these changes," Brewer and Dempsey wrote. "We will remain vigilant as these changes to the sales tax are implemented to ensure that they have the impact we anticipate."
In her Thursday release, Pitter said, "The new provisions serve as overlapping descriptions generally intending to tax software services that modify, enable, or adapt prewritten software to meet the business or technical requirements of a particular purchaser and to operate on the purchaser’s computer systems, regardless of how those services are described or billed to the customer. These taxable services may also be described as customization services with respect to prewritten software ... The application of the sales and use tax to Computer/Software Services will not apply to personal or professional services that do not themselves constitute computer system design services or software modification services and that are not directly related to a particular systems integration project involving the sale of computer hardware or software. Examples of such non-taxable personal and professional services may include (a) consulting and evaluation services with respect to existing computer systems to identify deficiencies and needs, and (b) services to prepare a business to use modified software, such as training. The Department intends to provide additional guidance in the future regarding the application of the tax on computer system design services and software modification services."
This could wind up becoming a ballot fight in the November 2014 election. No one involved with the idea is talking about it on the record, but there is significant chatter in the business community about putting a referendum question on the ballot to repeal the new tax, or, at the least, filing language for such a referendum by August 7, the deadline for beginning the ballot-question process, to keep the option open and maintain pressure on legislators to clarify and narrow the tax.
Widmer said it’s not just a question of a big, job-killing tax, but the hassle around so quickly deciphering and applying such a wide-ranging tax.
"Implementing it," Widmer said, "is going to be an administrative nightmare and tie businesses in knots."
With videographer John E. Stuart