Massachusetts' 'tech tax' on software said threat to local tech firms
SPRINGFIELD — Paragus Strategic IT of Hadley hires a new employee making at least $30,000 a year every six months and had been thinking of opening a branch office in Springfield to handle its growing workload.
But that branch office and the jobs associated with it are now more likely to go to Nashua, N.H., or Hartford because Massachusetts has imposed a sales tax on computer software services, said Delcie Bean, the 27-year-old CEO of Paragus who founded the company when he was still a high-school student in Amherst.
“It certainly does put pressure on future expansion,” Bean said. “Most state’s don’t have anything like this.” Besides creating an uneven field of competition, Bean said the state’s new “tech tax” expansion of the state 6.25 percent sales tax to computer and software services is also vague.
So vague that no one agrees on how much it will raise. The state estimates $160 million a year, but opponent Michael Widmer of the Massachusetts Taxpayers Foundation estimates $500 million. Widmer, in an essay published online, calls the tax the gravest threat imaginable to a tech sector that is producing jobs.
Techies are even finding it hard to tell what is taxed and what isn’t, Bean said.
“We are not able to comply with the law the way they have drafted it,” Bean said.
Scott W. Foster, a partner at the law firm Bulkley, Richardson and Gelinas in Springfield, said he thinks the sales tax law may be too vague to survive a lawsuit challenge brought by affected businesses.
Foster, who also is a a co-founder of Valley Venture Mentors, a nonprofit that helps startup tech companies, said he’s personally undertaking an educational effort to let tech startups know what their rights are. He spoke to about 70 technology executives at a meeting last week.
A lawsuit isn’t the only way to overturn the tax. A bill has been fielded in the legislature to rescind it. Another group also has started an effort to get a question on the ballot to rescind the tax.
But political consultant Anthony Cignoli, who is working with Foster, said both those efforts would take time. A referendum won’t even go on a ballot before November 2014.
Cignoli said he’s even hearing rumblings that computer people from neighboring states would campaign against the ballot question in hopes of keeping the tax, and their competitive advantage, in place.
Foster said a lawsuit isn’t a slam dunk. The state will fight. Even if the industry wins, it has little chance of getting its attorneys’ fees paid by the state.
Those fees could run $50,000 to $100,000. Part of the difficulty is figuring out where the non-taxable professional service ends and the taxable product begins.
Rachel Frank, a strategist and “happiness facilitator” at Gravity Switch, a tech company in Northampton, explained that the law’s wording is counterintuitive and displays a lack of knowledge about how the industry works. She said creating something totally new and never used before is not taxable. But if a company customizes existing computer programs, that is taxable.
The problem is, pretty much every computer application uses chunks of code that already have been written.
“We are in an industry that doesn’t like to reinvent the wheel,” she said. “For example, if we install Wordpress and we check a dialogue box, is that “configuration or is it not?” What if Gravity Switch employees sit down with a client, a pad and paper and sketch out what a client’s website might end up looking like? The drawing is not taxable, but if they build the website, it is taxable. She thinks.
“This is a big pain in our butts,” she said.
Gravity Switch’s founder, Jason Mark, has written in opposition to the tax and Frank said the company is considering legal action.
But in the meantime, Gravity Switch is working to raise awareness and keeping up with instructions as they get posted to the state Department of Revenue’s website. A full set of rules won’t be completed until October, the state says. Companies were supposed to start collecting the tax on Aug. 1. “We don’t know what we are doing,” Bean said.