Massachusetts Tech Sector May Catch a Break

At first blush, the Massachusetts “tech tax” appears similar to tax regimes in other states. However, the Massachusetts tax on computer software services has a unique set of implications—and would likely have an unprecedented impact on the state’s tech economy.

The software services tax or “tech tax” passed in July would tax all computer software services, including cloud computing and data storage operations. The legislature intended for the tax to raise $160 million for transportation improvements, but many believe the wide range of services eligible for taxation coupled with the law’s ambiguous language would yield upwards of $500 million.

Massachusetts is currently the only state specifically targeting services associated with computer systems and software. The state also stands alone in the decision to tax such a broad range of services at such a high rate—6.25 percent.

Four other states tax computer software services, but either tax these services at a lower rate or offer tax incentives to mitigate the strain on the high technology industry. Connecticut, for example, taxes general professional services at 6.35 percent, yet demands from computer services a reduced rate of 1 percent. The remaining states—New Mexico, Hawaii, and South Dakota—tax computer software services in concert with high-tech tax incentives.

Maryland, however, did propose a computer service tax in 2007, but, faced with strong public opposition, the tax was repealed before taking effect the following year. It’s odd for Massachusetts—another “tech state” and Maryland competitor—to push a similar measure that would deter software developers from locating to the region and, ultimately, make the state less competitive.

Massachusetts Taxpayers Foundation President Michael J. Widmer notes, “With Massachusetts losing 3,000 jobs since January, placing the highest tax burden in the country on innovation and technology—the state’s greatest economic strength—is simply bad policy.”

Governor Deval Patrick now echoes Widmer’s sentiment.

Following uproar from the tech community, Governor Deval Patrick determined to call for repeal of his own tax increase—before collecting funds. The only question is why tech businesses weren’t more vocal in the preceding months.

Legislators did not initially hear from the business community regarding the detrimental nature of the tax because the ambiguous policy left small firm owners unaware that their services were, in fact, taxable. Only once business’ tax and IT personnel began exchanging information did firms realize they would have to bear the burdensome tax each year.

Yet, the key takeaway from the Massachusetts tax debacle is that the tech community can no longer afford to sit on the sidelines of the state policy arena. In the 21st century, the level of engagement on the state level will increasingly determine the impact of policies on small business’ bottom lines—for better or for worse. Brian Cardarella, a principal at the Boston software firm DockYard acknowledges that the tech firms found themselves “in a position to be taken advantage of” because it has historically remained unengaged with state politics. Cardarella now worries that “engagement will go back to what it was.” But, tech community members simply cannot sit on their laurels after this victory; state level engagement should remain a priority for companies.