[Discuss] taxachusetts and the future of tech

[Rich Braun]

I have a good relationship with one of our state senators, Will Brownsberger;
after I wrote to him on a couple of BLU-related topics, this morning he posted
the following essay about the sales tax on software contracting.

Follow his blog at http://willbrownsberger.com/forums; this item is posted
under Taxes and Spending; he's also got a whole top-level section on
Non-competition Agreements (I moved to CA where such agreements are void, and
he's pushing for MA to adopt a similar law).

-rich
Ref: http://willbrownsberger.com/forums/topic/the-software-services-tax/

"I was pleased to report the successful completion of legislative efforts to
pass a transportation funding package. It represented the main product of the
first leg of the legislative session and was a very necessary and difficult
thing to do. I fully supported it and accept full responsibility for every
element of it.

Unfortunately, it now appears that one element of the plan just doesn’t work
well: The software services tax. A tax should, above all, be reasonably clear
in what it applies to. People should not face difficult daily decisions on
whether they need to pay a tax. It appears that the software services tax
fails this test.

The law has been on the books only three weeks, and the Department of Revenue,
valiantly trying to implement the tax fairly, already has a list of 55
“frequently asked questions.”

The new tax is levied in sections 48 and 49 of the funding package. These
sections operate together to apply the existing 6.25% sales and use tax to

“the planning, consulting or designing of computer systems that integrate
computer hardware, software or communication technologies and are provided by
a vendor or a third party . . . and the modification, integration,
enhancement, installation or configuration of standardized software” but not
to “data access, data processing or information management services.”

The tax needs to be paid on these services when purchased for use in
Massachusetts, regardless of whether the vendor is located in Massachusetts.

The recurring ambiguities that individuals and businesses will face include:

When is one writing new software as opposed to modifying or integrating
standardized software? For example, each page on a website like this one is
based on a “template” which defines how the pages are all going to look.
Creating a template is creating a separate chunk of computer code. However,
that template only functions when it plugs into a standardized software
package.
When is one configuring a computer system as opposed to engaging in tax-exempt
data access or information management? For example, a website is based on a
database of text — think of a record where one box on the record might contain
the text of a whole web page. A web developer is arguably engaged in the
business of data and information management as opposed to the configuration of
software.
When is the software being used in Massachusetts? If you are a firm with
businesses at multiple locations and purchase newly taxable services, you will
have to determine how to allocate them to Massachusetts. This problem is not
an entirely new one as purchasers of major software packages do already have
to make that allocation as the packages have been taxable for many years.
However, many major software packages are “open source” — downloadable for
free — and not taxable. These packages always require installation and often
require customization, services which will now be taxable. Many businesses
will need to determine new allocations and compute, report and pay additional
taxes.
In any given instance, the Department of Revenue, can take a position and
answer a question about taxability. Some are hoping that we will get through a
transition period and the protests will settle down and we will get on with
the business of the Commonwealth. My fear is that the business of software
development is so fluid that the conceptual boundaries may remain forever in
flux.

And, of course, we have to ask: Why single out software services for taxation
while leaving doctors, lawyers, accountants, dry cleaners and other service
providers tax exempt? Software is not like cigarettes — it is not something
one wants to discourage by special taxation.

But the big problem is not the money. The problem is the ambiguity of the tax:
Most people really want to abide by the law and uncertainty is scary. Many of
the players in the software industry are small businesses that can’t pay a
staff of lawyers and accountants to sort the issues out for them. We don’t
want to make Massachusetts a scary place for nascent information technology
businesses — our goal should be exactly the reverse.

Business groups have already announced a ballot plan to repeal the software
tax, which accounted for roughly 1/3 of the revenue funding the transportation
plan. Sadly, the controversy about this tax has now created uncertainty about
the funding of transportation itself — again, exactly what we were trying to
eliminate.

When you are herding cats, the one thing you never want to do is change
direction. Getting the transportation plan done was difficult for the
legislature. Unfortunately, I do believe that the legislature should go back
and revisit the transportation funding package this fall.