, Salem, MA

August 15, 2013

Our view: Time for Legislature to listen on software tax

The Salem News

---- — This morning, a cadre of business and political leaders, including representatives from the Massachusetts Taxpayers Foundation and major local employers like Peabody’s Analogic, will gather in Danvers to try to figure out how to respond to the Legislature’s newest and most addlebrained tax.

We refer, of course, to the new 6.25 percent sales tax on computer services, and the smart folks gathered at this morning’s special meeting of the North Shore Chamber of Commerce seem to be just as confused by it as the rest of us. If that’s not an indication the problem needs to be fixed, and soon, we don’t know what is.

The tax was tucked into the recently passed state transportation bill and is aimed at “certain services relating to computer system design and to modification, integration, enhancement, installation or configuration of standardized or prewritten software.”

The rules covering the tax are so broadly written as to be essentially useless for any business — small or large — trying to figure out how they apply. For example, according to state tax officials, if a state website designer is changing prewritten software for a customer, the work is taxed. But if that same designer creates new software, the job is not taxed. Software training isn’t taxed. Installing it is.

Confused? You’re not alone. When the Geek Squad visits your home to work on your computer system, they’re going to need to bring along a CPA. (And don’t forget, the cost of any new tax is passed along to you, the consumer.)

“I think it’s nerve-wracking as a small business, and I think businesses are already struggling, John McDougall, founder of Danvers-based McDougall Interactive Marketing, told reporter Ethan Forman last week. “Why add to that?”

Dave Gravel, a Peabody city councilor and CEO of a computer consulting firm, said he’s still trying to figure out how the tax applies to his business. Sometimes GraVoc Associates writes its own software, sometimes it uses prewritten software, and sometimes it pulls together many different pieces of software to complete a project. Where do you collect tax on a project like that?

Gravel noted the Legislature passed the tax July 25. It went into effect July 31, giving business owners about a week to figure out if they needed to collect the tax and rework their accounting systems to include it.

“This is like, in the middle of battle, learning how to use a machine gun,” Gravel said.

Lawmakers insist the tax was meant to scrape together about $160 million a year to help pay for transportation fixes. IT business leaders, however, worry the number could be closer to $500 million annually, putting a damper on innovation in a section of the economy that has been a strength for the state.

The North Shore Chamber is not alone in its opposition to the new tax. An initiative petition to put repealing the tax on the 2014 ballot appears to have enough signatures to pass early hurdles; what’s more, it has the support of executives from the Massachusetts High Technology Council, Staples and BJ’s Wholesale. The Springfield chamber is on board, as well.

It’s unclear whether lawmakers are willing to listen and address the problem before next year’s elections.

“Right now, I’m a little hesitant to say, ‘Yeah, this is going to be a big problem for the industry,’ because we simply haven’t seen the data,” Lowell Democrat Sen. Eileen Donoghue said during a recent radio appearance on WCAP-AM 680.

“A lot of people don’t understand what is going to be taxed, and that has to be kind of developed by the Department of Revenue,” she said. Yes, the Department of Revenue is still trying to figure out how the tax will work.

Tax now, write the rules later. It’s a stunningly poor approach to tax policy.

Donoghue is the Senate chair of the committee that oversees small-business issues. If she wants to know if the new tax is a big deal, she can call McDougall, Gravel or any one of the hundreds of other business owners already affected by the legislation. They can fill her in, and work can begin to repair the legislative damage.

Or lawmakers can wait until the initiative petition hits the ballot in 2014, when frustrated business owners and taxpayers may decide to toss them out along with the tax.