By Andy Metzger
State House News Service
---- — BOSTON — While drivers and smokers conversant in the doings of state government will have a fairly simple calculation for the added costs brought on by a $500 million tax bill, there is more confusion around how tax changes will affect providers and buyers of computer and network services.
“Even the Department of Revenue doesn’t know exactly how this is going to work and what services it’s going to effect,” Rep. Randy Hunt, an East Sandwich Republican and certified public accountant, told the News Service. A former computer programmer, Hunt said, “I can guarantee there will be companies that don’t collect it that later find out that they should have.”
The law that went into effect last Wednesday applies the state’s 6.25 percent sales tax to business-to-business software design and network services – but not data storage.
Lawmakers are eyeing a new revenue source that Massachusetts Taxpayers Foundation President Michael Widmer has warned could generate $500 million, far more than the $161 million estimate lawmakers attached to their tax hike.
The DOR will take comments and plans to release additional guidelines about the tax.
“The problem is the language that was passed is so broad the question is ‘What does it encompass?’” said Theodore Flynn, president of the Massachusetts Society of Certified Public Accountants. He said, “Staples for example has mega-online kinda stuff. Is it going to apply to a Staples? That’s a question and my concern is that it does.”
After overriding a veto from Gov. Deval Patrick and in the face of criticism of the tax, Democratic House and Senate leaders wrote to the Department of Revenue, saying they “will not hesitate” to change the new law if the “revenue or job impacts” are “greater than anticipated.”
Patrick, who favored a larger tax bill and included broader computer service taxes in his proposal, told reporters Wednesday he doesn’t believe the service tax will be as high as Widmer predicted.
“I don’t think it’s that. And they didn’t think it was that until the eleventh hour. You know like with every change in the tax laws, or every change in regulation or law that affects businesses we want to watch it as we go along. But at the same time, those same business and those same business leaders believe it is important for our growth to invest in our transportation infrastructure and that’s what we are going to do,” Patrick said.
Hunt sees the service sales tax opening the door for taxes on other services, an issue that roared to the forefront in the early 1990s when a newly elected Gov. William Weld helped block service taxes.
“What I’m afraid of is that argument will be used later on to justify sales tax on other services,” said Hunt. Aside from the new application of the sales tax to certain computer services, consumers do not pay a tax for other services, such as haircuts, tax preparation and legal advice. He said, “It kind of opens the lid a little bit to this Pandora’s Box.”
Hunt said the tax would apply to a vast swath of businesses, as so many pay others to custom-build websites, “back office” systems, and off-the-shelf software that is then customized to meet the needs of a particular hospital or other facility. The new 6.25 percent tax could have particular impact on businesses with slim profit margins, such as supermarkets that increasingly use technology to track customer purchases, Hunt said. In a state that prides itself on a high-tech economy, Hunt worried that Massachusetts firms will lose out to others because of the new service tax.
“My understanding is that depending on the type of situation that you’re in, a lot of these contracts are quite competitive,” Hunt said. “So even 6.25 percent can make a difference.”
In May 2012, House Speaker Robert DeLeo attempted to woo Facebook founder Mark Zuckerberg back to Massachusetts, touting a new economic development bill, which later passed into law. DeLeo spokesman Seth Gitell said the new computer service tax would not dissuade technology companies.
“The Legislature passed a carefully balanced transportation plan that limits the financial burden on businesses and families while making responsible and proactive investments in education and transportation,” Gitell said. “With our strong foundation in emerging industries, highly-trained workforce, public infrastructure investments, and additional economic and cultural attributes, Massachusetts is still poised to capture and retain innovation companies.”
The new tax has drawn sharp criticism from Charlie Baker, the one-time and potentially future Republican candidate for governor, who is now the entrepreneur in residence at the venture capital firm General Catalyst Partners.
“I cannot believe MA is going to implement the most expansive tax on software services in the country - at exactly the same time as this industry is poised to boom. I guess it will just boom elsewhere. Talk about stepping over a dollar to collect a dime,” Baker wrote on Facebook.
The Massachusetts High Technology Council has heard an outpouring of concern from its members, according to MHTC President Chris Anderson.
“We’ve got to believe that this is a temporary policy,” Anderson told the News Service. He said, “This cannot become a permanent feature of the Massachusetts tax landscape.”
Anderson said the Bay State taxing computer workers is like Florida taxing oranges, and said, “Since we are now the only state with such a broad tax, Massachusetts employers of all sizes will have a much harder time competing for and winning business.”
Anderson said the new sales tax would be applied even when the taxed services are not purchased as part of a package with the sales of a software or network product.
“You’re paying the tax on the service that occurs whenever it occurs,” Anderson said. He said, “It could be an old system that’s having a related upgrade.”
Google, which is in the midst of expanding its facility in Cambridge declined to comment, and the CEO of the Kendall Square startup incubator Cambridge Innovation Center was unavailable for comment on the issue. An official at the Cambridge Chamber of Commerce said businesses have been more concerned with the need for transit funding and have not posed any questions to the local chamber about the new tax.