Solution Providers Fight Back Against Massachusetts Software Services Tax

Software companies and supporters filed a petition Wednesday to fight back against a newly implemented software services tax in Massachusetts that has local businesses and advocates up in arms about its potential harm to one of the largest tech company hubs in the country.

The law went into effect July 31, just a week after its approval, and has left Massachusetts companies and those with clients in the state scrambling to adapt to the new tax, which is part of a new law to fund the state's transportation system. The law would extend the state's 6.25 percent sales tax, which was previously limited mostly to goods, to a wide variety of tech services, from building websites to updating software on a client's computer. The tax is expected to raise $161 million a year, but industry predictions say it could actually be more than $500 million because of the broad implications of the tax on businesses.

"It would cut a broad swath across the entire Massachusetts economy. When we call it a tax on innovation, we're not exaggerating. We pride ourselves on being a state on innovation -- that separates us from other states and gives us a competitive advantage," said Michael Widmer, president of the Massachusetts Taxpayers Foundation and an orchestrator of a petition against the tax. "Other states couldn't be asking for a better opportunity."

[Related: Massachusetts Channel Partners Struggling With Services Tax Proposal ]

The official process to get the issue on the ballot is a long one. Widmer and other industry supporters kicked off the process by filing their initial petition with the state attorney general last Wednesday. Although the tax could be repealed earlier, the petition fights to put the issue before a state vote, where Widmer and supports hope the tax will be reversed. As part of the petition, 20 signatures were submitted with representatives from smaller technology companies and big names such as Staples Inc., BJ's Wholesale Club Inc. and Boston Scientific Corp.

The next step is gathering approximately 70,000 signatures from all the counties in the state, though the real aim is more than 80,000, said Joe Baerlein, President of Rasky Baerlein Strategic Communications Inc., the company leading the advocacy campaign. That process will continue until the end of the year and then will switch into full gear with an advertising campaign and other media to raise public awareness. However, Baerlein said that he hopes the issue doesn't have to make it to that point and that legislature will see the opposition to the issue and repeal the offending portion of the law before it even makes it on the 2014 ballot.

NEXT: Local Businesses Already Feeling The Pain

Local businesses are already feeling the hit just days after the tax took effect, said Allen Falcon, CEO of Westborough, Mass.-based Cumulus Global, a cloud solutions provider. In particular, Falcon said he is affected by the taxes for services arranged prior to the July 31 start date that have not yet been serviced or had payment rendered. He said that, due to the short notice, Cumulus will have no choice but to absorb the extra costs itself, rather than returning to customers after a price agreement had already been made and asking them pay more to make up the price difference as a result of the tax.

"Do we tax everything and make ourselves less competitive and potentially overcharge our customers? Or do we take a stab at what's taxable and what's not with the understanding that we may face back taxes and penalties down the road?" Falcon said.

Massachusetts currently stands as the 6th largest tech employer in the country, according to TechAmerica, employing more than 250,000 workers. However, Falcon said that he has already heard of software development companies that are now looking out of state. He said his own company's expansion last April might have moved out of state if he had known the tax was going to be implemented because of the extra costs and paperwork headaches involved.

"What's interesting is that, in April, I expanded my office: got larger offices, signed a new lease and hired new people. If this tax had passed on Jan. 1, I would have strongly considered moving 20 minutes over the border to Rhode Island," Falcon said. "I would still have had to register in Massachusetts and pay the tax, but my life would have been much easier."

Widmer, of the Massachusetts Taxpayers Foundation, said that part of the problem with this industry in particular is that it is so mobile.

"A lot of these jobs are mobile, so you can just move across the border. Even if we win [with the petition], 15 months of implementing this can cause major economic harm, in terms of the software industry or people deciding to move across the border or not expand," Widmer said, referring to the time between now and the ballot vote set for November 2014. "I think a lot of damage can be inflicted in 15 months."

Chris Anderson, president of the Massachusetts High Technology Council, said the change would force companies to choose to either deal with the extra administrative costs or push forward innovation.

"It's an administrative burden that really dampens how you spend your time -- is it being creative or tax administration?" Anderson said.

NEXT: Legislators Respond To Tax Response

In a letter to the Department of Revenue, the co-authors of the law, Senator Stephen Brewer and Representative Brian Dempsey, asked the department to narrowly interpret the laws and stated that if the law extended beyond their intentions, they would modify the guidelines to more closely fit the $161 million goal.

"Should the revenue or job impacts be greater than anticipated, or if the tax is imposed on vendors not intended we will not hesitate to revisit these changes. We will remain vigilant as these changes to the sales tax are implemented to ensure that they have the impact we anticipate," the letter said.

Despite the fact that the legislature has already rolled back some of the wider-sweeping measures of the tax, there was no public hearing on the issue ahead of time, according to Massachusetts Taxpayers Foundation's Widmer, which would have given the industry a chance to respond to the issue.

"An accountant doesn't charge a sales tax on doing a tax return, but now I guess [we'll be charged] if the accountant installs software to work on your taxes," Cumulus' Falcon said. "It's definitely targeting. I think it's going to catch a lot of business out of state off guard."

In response to many requests for information, the Department of Revenue released an FAQ sheet about the tax that began to clarify the questions for which services were taxable and which were not. In the meantime, Falcon said that his company has no choice but to absorb the costs and wait and see what happens.

"In the meantime we're screwed," Falcon said. "There's no better way to put it."

PUBLISHED AUG. 9, 2013