Killing the Golden Goose: Massachusetts' Ill-Conceived Tech Tax

When you think Massachusetts, you think Red Sox, chowda, great colleges and hospitals and a vibrant high-tech sector. The tech sector provides good paying jobs and keeps graduates of our colleges in Massachusetts, among other benefits. So you'd think the Legislature wouldn't want to do anything to damage this sector of our economy.

Instead, Beacon Hill recently put the state's computer services industry at a competitive disadvantage. As part of its Transportation Finance package, the Legislature passed a law applying the state's sales and use tax to "certain services relating to computer system design and to modification, integration, enhancement, installation, or configuration of standardized or prewritten software."

What, exactly, does that mean? If you're confused, you're not alone. In fact, just about everyone is confused. What is "prewritten software?" Depending on how broadly you interpret that, a particular project may or may not be taxable. Do computer service providers collect the tax on everything and issue refunds if they've over-collected? Not charge the tax and risk being liable themselves? What about existing contracts?

Even the Massachusetts Department of Revenue is scrambling. They issued cryptic guidelines on July 25th (a few days before the tax went into effect), but admitted in those guidelines that they are seeking input and anticipate "...that further guidance will be issued in the future..." Meanwhile, the tax went into effect July 31st, and companies are expected begin forwarding the collected taxes by mid-September.

It's also important to remember that it's the end users - companies and individuals - who will be paying this tax, not the computer service providers. So not only does this tax hurt the competitiveness of Massachusetts' tech sector, it has a far wider economic impact than just that industry.

So what's being done about this? There are hints the Legislature may repeal the tax, but no guarantees, of course. There is a ballot question in the works, but that wouldn't even get put before voters until November 2014. What may provide the most immediate relief is heading to court.

There is a concept in criminal law known as the void for vagueness doctrine. Basically, if you can't understand whether or not what you're doing violates the law, there is a problem with the law itself. The concept has been applied in other areas of law and frankly that makes sense. If government expects you to do (or not do) something, they need to give you fair warning. A group called the SPARK Coalition (www.sparkcoalition.org) is planning on advancing this argument in an effort to at least seek an injunction against the implementation of the tax while this is all being figured out.

Here's hoping the SPARK Coalition is successful in obtaining an injunction. Better still, here's hoping the Legislature has the good sense to repeal the tech tax. Only 3 other states have such a tax, none are higher than ours and none of the other states have nearly the tech sector we have in Massachusetts. Let's not usher them out of state. 

- Olivier Kozlowski