Amidst growing opposition to a just-approved new levy on computer and software design services, Gov. Deval Patrick will host a private meeting in his office Wednesday morning with legislative and industry leaders to take stock of the technology business climate and potential impacts of the new tax.
Though it’s unclear whether Patrick and House and Senate leaders have an appetite for revisiting the tax increase this session, clamoring from the business community for lawmakers to either repeal the tax or clarify its scope has grown since late July when it was approved as part of a state budget and transportation financing bill.
Supporters have argued it is a necessary source of revenue to support investments in infrastructure important for business growth, but critics contend the language of the new tax law is vague and unfairly targets a vital sector of the Massachusetts economy, making the state less competitive with neighboring and competitor states.
Spark Coalition to seek and injunction
Some members of the technology industry have banded together in recent weeks to form the Spark Coalition, and launched what it calls the Beacon Hill Blitz this week to flood lawmakers’ offices with calls opposing the tax.
On the Spark website the group states, "We have started the process to file a court injunction to pause the MA Tech Tax. We are holding a conference call blitz 9/3, 9/4, and 9/5 to talk with those who are interested in joining the lawsuit. Join SPARK (for free) to be notified".
In mid-August Senator Karen Spilka (D-Ashland) filed a bill to repeal sales tax on computer software design services. Another group called No Tech Tax, which is also fighting the new tax, says Chapters 64H and 64I of the General Laws have been amended to apply the sales and use tax to certain services relating to computer system design and to modification, integration, enhancement, installation, or configuration of standardized or pre-written software.
Local Reps Hunt and Vieira on panel, "No taxation without explanation"
Two Cape Cod State Reps appear in the video on the Spark website. Upper Cape State Rep. David Vieira said, "Not only do I believe this tax is unnecessary and will be harmful to the computer services industry, the fact that the tax was not defined in the legislation is a disservice to every citizen and taxpayer in Massachusetts. I say No Taxation Without Explanation."
The coalition is working in consultation with the Massachusetts High Technology Council to consider filing for a court injunction to block the application of the tax on the grounds that it is “unconstitutionally vague.” The coalition is also supporting legislative and ballot-driven efforts to repeal the tax.
The Legislature approved the new tax, intended to generate $161 million in new revenue, as a key component of a broader $500 million revenue package to finance transportation investments. Though the governor vetoed the transportation financing bill only to have his objections overridden in the House and Senate, Patrick first proposed a similar tax on technology services in the context of his own larger tax reform proposal earlier this year.
“The governor wants to have an open conversation with business leaders, industry leaders and government leaders about where we stand with regard to the tax,” Patrick chief of staff Brendan Ryan told the News Service, suggesting that the governor did not have a desired outcome from the meeting.
Cast of today's Governor's Tech Tax Summit
The meeting will take place “late morning” in the governor’s office after Patrick’s appearance at 9:30 a.m. in Watertown to celebrate the expansion of athenahealth, according to an administration official familiar with the meeting, which was not included on the governor’s public schedule after he disclosed plans for it last week.
House Speaker Robert DeLeo, Senate President Therese Murray, House and Senate Ways and Means Chairmen Rep. Brian Dempsey and Stephen Brewer, Administration and Finance Secretary Glen Shor and Housing and Economic Development Secretary Greg Bialecki all plan to attend.
Other confirmed attendees from the business sector include Massachusetts Taxpayer Foundation President Michael Widmer; Massachusetts Business Roundtable chair and Verizon New England Regional President Donna Cupelo; Massachusetts Technology Leadership Council President Tom Hopcroft; Jeff Bussgang, a Harvard lecturer and partner at Flyberg Capital Partners; Massachusetts Innovation and Technology Exchange President Debi Kleiman; and Phil Edmundson, co-founder of William Edmundson and Associates.
Andy Singleton, president of Assembla, was also invited, but will not be able to attend due to another commitment.
GOP trying to block and/or repeal new bill
Republican lawmakers have been leading the effort first to block and now to repeal the software services tax, but opposition has begun to spill over with Senate Majority Whip Karen Spilka, also a candidate for Congress, filing legislation to repeal the tax after she helped approve it as part of the larger tax package.
Widmer has also partnered with groups like the Massachusetts High Technology Council and business leaders such as Staples CEO Ron Sargent to mount a drive to put a question repealing the software tax on the 2014 ballot.
Most recently, Widmer called the tax "the most anti-competitive piece of legislation in my 21 years as head of the foundation" and predicted it "will cause incalculable damage to job creation and the Massachusetts economy."
The respected head of the Taxpayer Foundation, however, has drawn public scrutiny from Beacon Hill leaders like Senate President Murray who have expressed frustration that Widmer did not raise his concerns sooner after initially backing and praising the framework of a transportation financing bill announced in April by House and Senate leaders that included the technology tax provision.
It wasn’t until months later, after Widmer said his analysts had time to dissect and study the tax’s potential impact, that he warned it could hit businesses with a much higher $500 million price tag.
DeLeo defends tax as "carefully measured plan"
DeLeo has defended the tax provision as part of a “carefully measured plan,” and budget leaders in the House and Senate, in the face of concerns about the tax, have taken the unusual step of vowing to work with state tax law administrators to make sure the tax does not expand beyond the $161 million scope envisioned by its drafters.
Patrick last week described himself as “concerned but not alarmed” by the growing calls from the business sector and some Democrat and Republican lawmakers to repeal the tax, either through legislative action or at the ballot box.
“If there is to be a fix, then we need to have the whole conversation which is what do we replace it with,” Patrick said. The governor said he was particularly troubled by the “reputational impact” the tax was having on Massachusetts.
Joe Baz, president of the Spark Coalition, said the industry has been trying to understand the new tax.
“I do give DOR a lot of credit for trying to take this bill and interpret it and parse the language to create some clarification. Unfortunately there’s not enough information you could probably provide that would answer individual software companies and IT companies needs,” said Baz, CEO and founder of Above the Fold, a Cambridge-based Web and mobile app design firm.
Baz said many small firms like his, which employs eight people in Central Square, offer clients blends of pre-written and custom software, some of which is taxable under the new law and some of which is exempt. Baz, who moved to Boston from Washington D.C. in 2007, said he supports increased investment in transportation and doesn’t want to leave to Massachusetts.
“I think if we had more time and could dissect this and figure out a way that wouldn’t cause such widespread confusion,” Baz said. “At the moment I am not confident of finding a replacement of the tax, but I’m not opposed to a tax in general. It just depends on what’s on the table.”
While it will be the larger businesses that purchase software solutions that will end up paying for the new tax, many small start-up companies worry that the market for their products will dry up because of the added 6.25 percent sales tax.
New tax will drive business out of state
“The incubators and those who generate start-ups will advise them to go somewhere else. I know I would,” said Joshua Opper, a Massachusetts native and one of three partners who founded Utility Data Center and works from home. “If in 2007 when I started this business I knew Mass had a 6.25 percent tax I would have said, ‘Let’s start somewhere else.’”
Opper said his firm recently bid for a $200,000 contract with an unnamed potential client, but did not factor the sales tax into the bid price. Once confident he had a low bid, Opper now says he probably lost the contract because he can’t resubmit, though it would have been a “skinny margin” to remain competitive with the tax added to the cost anyway.
“I don’t think anyone is struggling yet because it hasn’t had the time to impact them. I don’t think half our industry even knows. But I think it will be insidious, quite frankly. There’s no reason to take bids from here if you can avoid it,” said Opper, part of the Spark Coalition who favors repeal.
Though the coalition is pursuing an injunction, Opper said there are some supporters who think it will give the industry time to fight for repeal, while others fear it will just give lawmakers time to “fix” the tax.
“The problem is we’re just so targeted. The four other states that have sales taxes on services tax all services, so at least that’s fair across the board. Why our subset of services, and not lawyers or plumbers? I wouldn’t be happy about that either, but at least it would be fair,” Opper said.
Regardless of what happens with the tax, Spark Coalition leaders say they hope they can become a resource to educate lawmakers about the tech industry and can stay informed about Beacon Hill happenings in the future.