August 16, 2013

Democrats Defend Tech Tax Despite Repeal Effort

Facing continuing opposition to a new computer services tax from business groups, Republican lawmakers and now a top Senate Democrat, legislative leaders this week circulated explanations of the purpose and mechanics of the new tax.

House Ways and Means Chairman Brian Dempsey sent out a fact sheet describing the tax as "modernizing" the tax code so customization of already-taxed, purchased software also falls under the tax code.

"The changes to the sales tax will help level the playing field by requiring technology companies' products to be subject to the sales tax, just as other businesses' products are taxed," Dempsey's fact sheet stated.

Senate Ways and Means Chairman Stephen Brewer and Michael Rodrigues, Senate chairman of the Revenue Committee, also emailed members a fact sheet noting the various computer services that will not be newly subject to the 6.25-percent sales tax, including technical support, website hosting, services used by non-profits and custom software not based on pre-written software.

"The estimated $161M in revenue from this tax change is necessary to support substantial new investments in local aid and education," read the Senate Democrats' fact sheet.

Meanwhile, Sen. Karen Spilka, the majority whip who voted in favor of the measure bundled into a $500 million tax bill in July, announced plans for a repeal of the tax, aligning herself with the Republican caucus that opposed the measure and warned of its potential repercussions in the high-technology industry.

"Why doesn't she come out and say, 'You know, I was totally wrong. I didn't do my job,'" House Minority Leader Brad Jones said of the Ashland Democrat, who is seeking election to Congress.

While a growing movement to place a repeal on the 2014 ballot could help others seeking office next year, Jones said his priority is to remove the law from the state books right away.

"It's better for the citizens of the commonwealth to get rid of this tax as quickly as possible," Jones said.

Senate Minority Leader Bruce Tarr signaled Wednesday that he'll try to repeal the tax with legislative amendments.

Legislative Route

"I am glad that some of those who have voted consistently to support the computer services tax are now realizing just how destructive it is to our economy and are interested in joining our efforts to oppose it," Tarr said in a statement Wednesday. "We will continue to explore each and every opportunity to eliminate this tax, including the continued filing of amendments and a bill that is nearly ready to be submitted. Hopefully now those who are seeking to change course will join us on the one that we have been pursuing since the tax was first proposed, and together we can stop this job killing measure."

The tax was included in the $500 million tax package Democratic lawmakers passed over a veto by Gov. Deval Patrick, who thought the revenue stream was not sturdy enough to guarantee future transportation investments.

A report released Thursday by the technology employment agency Dice said the computer services industry in Massachusetts has grown 4 percent so far in 2013, second only to New Jersey, where it grew 5.2 percent. Also on Thursday, the state reported the unemployment rate ticked up to 7.2 percent, only 0.2 percentage points below the national rate.

"Now we're darn close to what the national average is," Jones said. "We're not leading anymore."

The tech tax will generate $161 million annually in revenue, according to Dempsey and Brewer, who have said they will monitor revenues to ensure they don't exceed that amount. Massachusetts Taxpayers Foundation President Michael Widmer has warned that the tax could generate $500 million, and said he has repeatedly met with top lawmakers to share his concerns.

Lawmakers seeking a repeal could potentially couple that with a different tax increase to offset the foregone revenue, though Jones said that would be unnecessary.

"We spill far more than that money every year in state government," Jones said, noting the state took in more than $150 million more in fiscal year 2013 than was originally predicted.

As the Department of Revenue issues more guidance to those potentially subject to the new tax, Jones said he worries the state agency will have the power to calibrate the amount of revenue it takes in, potentially increasing the take in future years if the need arises.

"I think that's the wrong way for policy to be made," said Jones, who said the DOR is "reverse engineering" the tax to fit the $161 million goal. He said if it had to be done, "it should have been done with a lot more advanced warning and advanced notice."

Lawmakers faced criticism for not holding a hearing on the $500 million tax bill, the framework of which was announced jointly by House Speaker Robert DeLeo and Senate President Therese Murray, then pushed rapidly through the branches by the legislative leaders.

Legislative leaders have said public hearings on Patrick's budget, which included a $1.9 billion revenue increase and a more expansive computer services tax, were sufficient to meet the requirement that a bill receive a public hearing.

Dempsey's communique described the new tax as a way to "level the playing field" as the sale of off-the-shelf, taxable software can be bundled into the previously untaxed service of software customization.

"There are some businesses who were selling directly to clients (not through third party vendors such as Staples) that were not charging for the sale of prewritten software who recently became aware of this application," the fact sheet stated. "Businesses should not have been packaging computer services with the sale of prewritten software, thus avoiding the sales tax on the latter. While these businesses already had a responsibility to collect the sales tax from their clients; DOR will only be looking at transactions going forward from the effective date of the modernized tax."

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Read more

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Tech Tax: What Were They Thinking?

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