Repeal of Massachusetts “Tech Tax” May Be Imminent

by M. Robinson & Company, P.C.

The repeal of the so-called “tech tax” on certain computer system design and software services may be imminent. Key indicators include wavering support of the “tech tax” among rank-and-file state senators and representatives and cautious support for repeal by politically-wired presidents of chambers of commerce. The “tech tax” is being brought down by a combination of factors:

  • The tech community is rapidly becoming politically aware. It is poised to lobby Beacon Hill today for the repeal of the “tech tax.”
  • The “tech tax” is so complicated that the Massachusetts Department of Revenue (“DOR”) admitted, in writing, that it had issued “contradictory” informal advice in its commendable effort to provide immediate guidance on the new law that went into effect only 7 days after enactment.
  • The “tech tax” is discriminatory, targeting smaller businesses even as it “carves out” exceptions for larger businesses.
  • The “tech tax” is bad public policy.  It would be as shortsighted as if the Florida state legislature enacted a special tax on the state’s citrus industry.
  • The Massachusetts Taxpayers Foundation spearheaded a repeal initiative and certified it in time for inclusion on the November 2014 ballot.
  • The rank-and-file legislators were told that the “tech tax” was an “easy fix,” designed to raise $161 million of a roughly $30 billion Massachusetts budget. In fact, the Massachusetts Taxpayers Foundation, using the DOR’s own revenue scoring data, determined that the “tech tax” could bring in upwards of $500 million. This is not the tax the legislators voted for.

Even as we contemplate the imminent demise of the “tech tax,” we must acknowledge that the traditional Massachusetts tax base[1] is eroding, making it increasingly difficult to maintain our current level of state services and our current transportation infrastructure. This erosion is caused, in part, by the transition of the Massachusetts economy from a 19th-century economic model based on manufacturing towards a 21st-century “post-industrial” model based on services. Thus, as we reinvent our Massachusetts economy, we must also rethink how we tax ourselves.

As we go through the unavoidably contentious process of rethinking how we tax ourselves we must keep in mind important lessons:

  • The tech community has learned that it cannot allow Beacon Hill to sacrifice the tech community’s important economic interests on the altar of fiscal expedience – in this case, avoidance of a 5 cent per gallon increase in the gasoline tax.
  • Beacon Hill has at least two lessons to learn. First, Beacon Hill must formally solicit comments from affected parties before enacting a new tax. If Beacon Hill had solicited comments, it would have quickly discovered the intense level of political opposition to the “tech tax” from the tech community. Second, Beacon Hill must do more than ask the DOR to score a proposed new tax for revenue potential. Beacon Hill must also ask the DOR to score a proposed tax for complexity: How many pages of additional regulations might be required? How many additional auditors? If Beacon Hill asked for this additional information, it might have learned that the “tech tax” is complex and that the cost of enforcement is disproportionate to the anticipated additional revenue.

For the time being, however, the “tech tax” is the law. Businesses are reminded that they are required to report and pay sales and use taxes on computer system design and software modification services rendered on or after July 31, 2013.

[1] One broad measure of the “Massachusetts tax base” is the spectrum of economic activity – manufacturing and services – that occurs within Massachusetts.  With minor exceptions, the current tax on Massachusetts economic activity is measured solely by prices paid on the transfer of tangible personal property.  Thus, the “Massachusetts tax base” can be said to “erode” as economic activity increasingly involves the rendition of personal services that are currently non-taxable.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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