Massachusetts Computer Services Tax Riles IT Industry

Massachusetts' legislature has proposed imposing a 6.25% sales tax on computer and software services. Opponents of the bill say the new tax would negatively affect the state's technology industry, create a drag on innovation and hurt other industries and businesses that use these services.

The tax is part of a transportation bill meant to address the Massachusetts Bay Transportation Authority's budget deficit. The bill was adopted by the House of Representatives on July 17 and by the Senate on July 18. It initially passed in June, but Massachusetts Governor Deval Patrick returned it to lawmakers in a dispute over toll revenue. If enacted, the legislation would enforce a 6.25% sales tax on certain computer and software services in the state.

The stakes could be significant. Massachusetts is the sixth-largest tech employer in the U.S., and 9% of the state's private sector talent works at tech firms, according to industry trade group TechAmerica.

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The tech industry, however, had been slow to challenge the proposed tax, according to Senator Stephen Brewer, who chairs the Senate Committee on Ways and Means. "We heard precious little from industry," he told the Boston Globe.

That's changed in recent days as opponents have challenged the bill, arguing that it would put the state at a competitive disadvantage.

TechAmerica issued a letter to members of the Massachusetts General Court asking to "fix the computer system design services tax so that Massachusetts can maintain -- if not strengthen -- its place as a leading high-tech state."

"While we understand the need to fund critical transportation infrastructure projects, there must be careful consideration of the impact that new taxes pose on businesses. [The tax] does not strike that balance and punishes businesses -- particularly the technology sector," Kevin Callahan, TechAmerica's director of state government affairs for Massachusetts, said in the letter. "The purpose of the tax is to increase state revenue; however, driving business out of Massachusetts would ultimately have the opposite result."

Callahan also contended that the effects would be felt not only by the IT sector, but many other industries as well, including retailers, restaurants, banks and healthcare providers. Consumers, too, would "bear the weight of this new tax," said Callahan.

Another group, the Massachusetts Taxpayers Foundation, said the tax on computer services could cost the state's employers an additional $500 million annually. "The tax takes clear aim at the state's innovation economy, which is the essence of the state's competitive edge and at the core of its economic future. Many of the key investments in computers and software that help to incubate groundbreaking discoveries and cutting-edge ideas will now be subject to the sales tax," the nonprofit research organization said in a statement reacting to the initial bill in June.

Only three other states have a sales tax on computer services -- New Mexico (5.1%), Hawaii (4%) and South Dakota (4%).