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Possible Tech Levy Alarms Sector

Jun 27, 2013Boston Globe, Council in the News

Executives, groups say tax vague, unfair; Could hit state’s big companies, start-ups

By Michael B. Farrell

Technology executives and trade groups are alarmed by potential new taxes on computer services included in a transportation finance bill Massachusetts legislators passed Wednesday night, saying the legislation is too broadly written and will impose unfair levies on many different aspects of a key sector of the economy.

The tax is part of a bill the Legislature wrote to finance some $500 million in improvements to the state’s transportation infrastructure and was passed by both chambers.

It would extend the 6.25 percent sales tax to so-called computer systems design services, which critics say is so vaguely defined that it could be applied to almost any business that relies on third-party software vendors.

Depending on how tax regulators apply the legislation, the levy could hit some of the state’s biggest employers and promising start-ups alike, and be assessed on a wide range of activities, from custom Web design to smartphone apps to sophisticated software for industrial applications. While the state forecast the provision would raise $160 million in revenues, critics claim it could amount to $500 million in additional taxes on technology users.

“That provision alone could be a half-billion dollar tax hike aimed at the very heart of our technology economy,” said Chris Anderson, president of the Massachusetts High Tech Council, an industry group. “The question for the Legislature is why would we want to blunt that edge, and let other states get ahead of us.”

The Patrick administration, which initially proposed a broader version of the tax, did not return calls for comment. But the governor said in a statement Wednesday that he will not support the bill in its current form because it does not raise enough money for transportation.

State lawmakers, meanwhile, said they had narrowed the scope of Patrick’s initial proposal from a broader tax that would have covered such hot areas of the Massachusetts technology sector as cloud computing and so-called big data analytics.

“We scaled it back and looked for something that was fair, reasoned, and balanced,” said Senator Thomas McGee of Lynn, chairman of the joint Committee on Transportation.

According to the current version of the proposal, computer system design services are defined as “the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party.”

But that description, business leaders said, is still too vague, and it could lead regulators at the Department of Revenue to apply the tax to transactions that lawmakers had not intended, said Andrew Bagley, director of research for Massachusetts Taxpayers Foundation.

That ambiguity is creating concerns within the business community, Bagley said, and comes at a time when other states are offering incentives to attract technology companies.

But McGee and a colleague, Senator Stephen Brewer of Barre, chairman of the Senate Committee on Ways and Means, said they would lobby the Revenue Department to ensure the taxes are not too far reaching.

The tax proposal snuck up on many in the technology industry, as several prominent local companies said they did not know the legislation was even under consideration, while some industry groups said they weren’t sure of its overall impact.

“We need a clarification of this law as soon as possible,” said Dave Andelman, president of the Restaurant and Business Alliance. “Businesses should not be required to guess on what items they should pay taxes.”

Increasingly, the Massachusetts High Technology Council is stepping up to create, execute, and lead critical statewide competitiveness strategies. Fostering a vision for our innovation economy under the MassVision2050 banner, the Council solidifies its position as a thought leader providing valuable insights to navigate emerging technologies, facilitates long-term planning, and reinforces the Council's commitment to excellence and action in the evolving Massachusetts tech-driven economy.

To learn more, contact Council President Chris Anderson.