Quickly Passed, Implemented, Software Services Tax Hurts, Industry Says
PHOTO/Matt VOLPINI
Rick Porter, of Cinch IT in Worcester
Tom Hopcroft of the Massachusetts Technology Leadership Council: Tax will make state less competitive.
Weeks after state lawmakers expanded the 6.25-percent sales tax to include computer software and services, Central Massachusetts companies big and small, inside and outside the tech sector, are either grappling with its details or pushing to get rid of it.
Opponents say it’s too broad, unfairly targets one of the state’s largest growth industries and was implemented so quickly — one week after legislators passed it — that tech companies and their customers haven’t had a chance to clearly understand what should be taxed and how.
“It’s a bit alarming for the tech sector,” said Tom Hopcroft, president and CEO of the Massachusetts Technology Leadership Council, a tech industry group. “It’s going to make us less competitive compared to our peers in other states.”
Passed as part of a transportation funding bill along with increased taxes for cigarettes and gasoline (which Gov. Deval Patrick originally vetoed, saying it wouldn’t raise enough revenue), the computer software and services sales tax in Massachusetts is the highest in the country. Just three other states — New Mexico (5.125 percent), Hawaii and South Dakota (4 percent each) — impose the tax, according to the Massachusetts Taxpayers Foundation (MTF). Meanwhile, 15 states, including Maine and Rhode Island, offer tax incentives related to software and computer services or data centers, the MTF said. That leads Hopcroft to suspect that the sales tax could push a company out of Massachusetts.
“Tech companies are not capital intensive,” he said. “They don’t need big mills of the old days and a lot of equipment; they’re very easy to move.”
A repeal effort led by State Sen. Karen Spilka, D-Ashland, is already underway. “Digital technology is at the heart of our innovation economy and key to our future prosperity,” she said in statement. “We want technology companies, big and small, to thrive here.”
How It Works
According to the Massachusetts Department of Revenue, companies don’t need to tax transactions done with businesses out of state. A customer with operations in multiple states can also get a certificate that would allow it to be taxed only for software modifications and services that apply to Bay State operations.
But Prasanna G. Kidambi, a senior tax manager with accounting firm Stowe & Degon LLC in Westborough, said his clients have said it won’t necessarily be easy to determine how to break down what service is provided for Massachusetts versus other locations because of companies that run their technology infrastructures in the “cloud,” rather than on on-site servers.
“It will be very difficult for global technology companies that are operating in the cloud to allocate labor for users in Massachusetts,” he said. “A company with 10,000 users worldwide will now need to establish a system to allocate labor cost to Massachusetts users for sales tax purposes.”
Ranjan Kalia, CFO of Westborough-based Virtusa Corp., doesn’t believe the tax will have a big impact on his company, partly because only 5 percent of the company’s sales come from Massachusetts. But he said the state should be more business friendly and that imposing a new tax, especially in the middle of the year without giving companies time to understand how they will absorb the impact, does “not bode well in my mind for saying ‘We’re a business friendly state.’ ”
Large, international companies like Virtusa may be better poised to fend off the effects of the tax and find enough reason to stay in Massachusetts. But it’s the smaller companies that are at biggest risk for leaving, Hopcroft said.
One reason: They often employ workers in their 20s who aren’t married with children and are more open to relocating, he said.
But the firms that stay must determine how to apply and manage the tax.
The tax applies to pre-written software that’s modified for a specific business as well as computer services, such as troubleshooting or installing software. But companies are figuring out what that means for them and their customers.
Rick Porter, account manager at Cinch IT, a Worcester computer services and support provider, said determining how the tax affects his company has been “miserable,” and he’s wondering how small businesses will manage their billing. Whereas Cinch IT would have charged a customer for an hour of service through billing software in the past without evaluating the type of service provided, now someone has to review each transaction and determine whether tax should apply. For example, if a customer called for assistance before, he or she would be billed the same whether the technician instructed the customer to adjust wires, or whether the technician had to wipe the system and reinstall it, based on time. But now, the latter scenario carries the tax.
“It is very, very time consuming at this point because we haven’t found a good way to manage it,” he said.
Lawmakers have said the tax will generate $161 million annually in new revenue, but the MTF believes it will be more like $500 million as the tax reaches beyond what legislators expected, since just about every industry relies on some kind of software and needs computer services.
Porter believes the tax could put a strain on his customers.
“The IT budgets of our customers and most people anywhere are constantly shrinking and their needs are growing,” he said. “They’re kind of two contradictory patterns right now … And now, when new technology is needed, it’s going to come at an additional cost, and I think it’s going to play a major role in customers’ decision-making processes.”
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