Business Owners Say The New ‘Tech Tax’ Has Its Wires Crossed

An estimated $161 million each year to help the state's transportation infrastructure is coming from tech companies.

Business owners from the state’s tech sector are threatening to move their companies elsewhere, just days after a new tax on computer software purchasing was implemented in Massachusetts as part of the Transportation Finance reform.

“We are now in sour grapes mode, where they made these decisions, and now we have to deal with them. That being said, the circumstances of the bill are completely irresponsible,” said Brian Cardarella, the principal at DockYard, a web and mobile application development software consultancy firm.

The House and Senate passed an override last week to pump $800 million a year into the state’s transit services, roadways, and bridges, despite a rift with Governor Deval Patrick over where the funding should come from.

Included in the override package were tax increases on cigarettes, gasoline, and the new computer system service tax, which applies the state’s 6.25 percent sales tax to “certain services relating to computer system design and to modification, integration, enhancement, installation, or configuration of standardized or prewritten software,” according to the language of the law.

The change is expected to bring in $161 million in revenue annually to help fund the state’s ailing transportation infrastructure.

On July 31, the software service tax officially became law, and within a day, business owners like Cardarella were biting back at the legislature, calling for a repeal of its implementation. “I’ll admit for some of us, it’s our fault for not paying attention to what was happening as legislation is being discussed, but we have preexisting contracts with clients that are now affected by this sales tax,” Cardarella said.

Joshua Opper, a managing partner at Utility Datacenter in Boston, started a petition this week, claiming the “tech tax” will “cripple” small IT service companies in the city, and state. “It will also drive services that can be performed anywhere with today’s technology out of the state of Massachusetts. The actual law is vague and written so as to be almost indecipherable,” Opper wrote on his page, aimed at Patrick. “This tax inhibits IT business in our state and has a considerable impact on small companies who either provide or use these services.”

Opper had more than 80 supporters from the IT and consultancy field backing his claims as of Thursday afternoon, with some saying that the tax will make their business “less competitive,” and others threatening to move their companies out of Boston. While Cardarella has no plans to go anywhere outside of Boston, he still wants to address the issue.

Representatives from the Massachusetts Taxpayers Association, who argued against adding it to the Transportation Finance bill, called the tax the most sweeping in the nation. “It strikes at the heart of the state’s innovation economy and will stifle job creation for years to come,” they said in a statement.

The new sales tax hits both software consultants and developers, and could put a serious dent in customer relations, something Cardarella is nervous about. “The estimations for [our customers] are defined, and this tax will put financial strain on those relationships. We are going to pass this on as every other business does, but if we were to absorb it, it would kill our profit margin and would leave very little incentive for us to run the business in the first place,” he said.

Just as troubling as the 6.25-percent sales tax is the “broad definition” of the law’s language, and the short notice—roughly seven days—in which businesses were forced to take on the latest changes, Carderalla said. “A lot of people are finding out this thing existed [now]. Even with seven days notice, it’s really short to have to deal with this tax. To automatically find this and incorporate it into their business is difficult,” he said. “I think it just builds on the idea that tech companies should look elsewhere.”

Officials from the Department of Revenue said they intend to provide additional guidance regarding the application of the tax on computer system design services to help clarify how it will work, and have encouraged companies to come forward with questions.

In a letter to the tech sector, dated July 25, a few days before the bill was passed in to law, the Committee and Ways and Means said business owners expressed a “high level of concern” about the scope of the tax change, however, they said should the job impacts or revenue changes be greater than anticipated, they will not hesitate “to revisit the changes” and “remain vigilant.”

But in the meantime, Cardarella isn’t taking any chances, and has organized a meet-up for area business owners that could feel the shock of the latest tax, so they can better understand what they are up against. “We plan to host an open forum to discuss the software sales tax at our office next week,” he said. “I am working on getting a Department of Revenue [representative] there.”