5 Myths Circulated By Memos In Massachusetts Legislature About Tech Tax

Misleading Memos On Tech Tax

In two memos sent around the Massachusetts legislature Friday, lawmakers addressed the tech tax controversy and attempted to address common complaints. The fact sheets, sent by Democratic Rep. Brian Dempsey, and Sens. Stephen Brewer and Michael Rodrigues, provided some background on the tax and reiterated its importance to "modernize" the tax code.

However, there are disagreements over whether the memos tell the whole story and explain the steps taken in the legislative process.

"It seems to be an attempt to dive into the weeds in the hope of finding clarity," Republican Sen. Bruce Tarr said. "I don't think it does that." Before the tax was passed into law, Tarr proposed three amendments that would have removed it from the bill.

Take a look at five reasons the fact sheets present evidence for the legislature's support of the tax, and why they are incorrect.

Myth 1: The Tax Mostly Affects Larger Corporations

When explaining what computer system design services were, the fact sheet said that some examples of industry leaders affected by the change would be IBM, Hewlett-Packard and Oracle.

Michael Widmer, president of the Massachusetts Taxpayers Foundation, an organization closely following the tax fallout, disagreed, saying that small businesses that cannot absorb the added costs would be most affected by the tax.

"They totally neglected to discuss the impact on small businesses," Widmer said. "Small businesses totally got slammed with this."

The effect on the Massachusetts economy as a whole, Widmer said, is that it is much easier for smaller companies to pick up and move across state borders where there is no tax.

Myth 2: The Tax Simplifies The Tax Code

One of the major complaints from across the state is that businesses can't figure out how to apply the tax to their company due to a lack of guidance in the language of the law. The Department of Revenue has been handling the implementation of the tax and has attempted to address common questions as best they can. A growing frequently asked question list has, at last count, 55 common questions with answers from the DOR.

"I'm trying to comply with the law," said Bill Wilder, co-owner of Development Partners Software Corporation in Massachusetts. "That's the intent. I definitely want to comply with the law. It's hard to comply with a law I don't understand."

Additional questions can be addressed to the DOR through [email protected].

Myth 3: Lots Of Other States Have The Same Tax

The House memo states that "over 30 states apply their sales tax to computer software in some fashion," a number that Carolyn Ryan, a policy analyst at the Massachusetts Taxpayers Foundation, said is misleading. According to her research, more than 32 states tax boxed software with similar tax rates to Massachusetts. However, if the services associated with that software are separated during billing, they are no longer taxable.

"That's why we're much different," Ryan said. The memo went on to list seven states with "similar tax rates" on computer services, but Ryan said that, too, was misleading. Two of the states used to have the taxes but they were repealed more than five years ago.

"I'm not sure where they're getting their information on this," Ryan said. Her organization's study showed that the Massachusetts software services tax is the highest in the nation.

Myth 4: There Were Public Hearings

Both the House and Senate addressed the controversy over the lack of a public hearing for the software tax. The fact sheets stated that there were eight hearings held on the budget proposal as well as several on transportation funding, of which the tax is a part. However, the hearings referred to were in connection with a previous proposal by the governor that had broader tax implications. There were no hearings held on this specific tax bill, according to Widmer and the legislature's records. "When they put their own package together, they held no hearing whatsoever," he said. "They held no hearings on that proposal, either before they had it in the bill, or after."

The fact sheet said that the legislature reached out to local technology organizations, specifically mentioning the Massachusetts Taxpayers Foundation, among others. Widmer said that he could not recall the legislature reaching out to him or any organized effort to connect with local business owners. The Massachusetts Taxpayers Foundation did send a statement to the legislature in March, calling the tax a "Pandora's box."

Myth 5: The Tax Will Only Raise $161 Million

Both fact sheets stood behind the assertion that the tax would only raise $161 million in revenue and restated that if the scope of the tax proves to be too broad it would be pulled back.

"It does provide the insight from the folks that brought us the tax and helps us to understand what they were thinking and what goal they were trying to achieve," Sen. Tarr said.

Widmer stood behind his widely dispersed assertion that the tax would raise more than $500 million. The numbers his organization found, he said, were based on a close study of the industry, patterns in other states and the Department of Revenue. "There really is no meaningful defense of why we should be taxing innovation and technology," Widmer said.