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Patrick’s Budget Includes Expansion Of Cloud Computing Tax

BOSTON — Have you ever had someone host a website for you? Maybe you’ve hired a company to write customized software to crunch data for your business, or you back up your iPad’s data on the cloud. You probably did not pay a state tax on those services, but that would change under a little-noticed provision in Gov. Deval Patrick’s fiscal 2014 plan to boost state spending by $1.9 billion.

Raise the income tax, lower the sales tax, add a 15-cent tax on a gallon of gas — all of these have been part of the public discussion on the governor’s ambitious plan to finance new transportation and education spending.

But what about the $265 million line item that expands the sales tax on “canned software”?

“I think the best way to say it is we need our tax code to catch up with the way that technology is affecting everyone in their daily lives,” said David Sullivan, legal counsel for the Executive Office for Administration and Finance.

Sullivan’s office is down the hall from the governor’s State House office. Administration and Finance is the parent of many state agencies, including the tax-collecting Department of Revenue.

“Our tax agency is no different from the rest of the world. We’re not living in the 19th century any more,” Sullivan said. “We have modern products that have modern needs, and we have to accommodate to those needs.”

By that, Sullivan means taxing those “modern products” at 4.5 percent, the reduced sales tax rate Gov. Patrick has proposed.

The governor’s proposal would tax, for example, a yoga studio’s custom website. It would also tax backing up data on the cloud, but not music and e-books. The largest portion of the new tax would be collected from specialized business software services – a fast-growing part of the state and national economies.

The corporate headquarters of Intelligent Integration Systems Inc., in Boston’s financial district, is an unassuming place — a few offices in a shared suite, desks strewn with computers and ledgers. But CEO Paul Davis, who started the company seven years ago, said its revenues have steadily grown to more than $10 million a year.

“We’re a developer of software that works with data warehouse platforms that process really large quantities of data,” Davis explained.

Davis was surprised — shocked even — when he first heard of the governor’s plan, which could add the sales tax to custom versions of the company’s software.

“It’s untenable,” he said.

Davis said that when added to the governor’s plan to raise the income tax, the expanded sales tax starts to look punitive. Plus, he said the proposed language is ambiguous and would create a mountain of confusion for software companies and software users.

“Government schemes that are inherently that hard to assess — it’s just an invitation to interference and inefficiency and I think a signal that it has to be rethought,” Davis said. “Even if they, God help us, raise rates or whatever, this kind of approach I don’t think is going to work for any party.”

The Department of Revenue has not estimated just how many businesses or individuals would be affected by the new tax, just that it could raise almost a quarter billion dollars a year. But it’s clear that some big companies — those in information technology, in particular — would have to contend with it.

Jim Klocke, of the Greater Boston Chamber of Commerce, said the new tax could induce businesses who make or buy custom software to move those operations elsewhere.

“Computer services is among the most portable of industries; it’s also one among the most important and well-paid of industries,” Klocke said. “So we want it to grow and stay here and we’ll want to be very careful about that tax burden we’re going to place on that industry.”

At least 14 other states have enacted similar taxes, and as many as 28 have at least some components of what’s being proposed in Massachusetts.

For at least a year, the Department of Revenue has been fielding business requests for clarification about what software services they need to pay or collect taxes on. But Patrick says the new tax would end that piecemeal approach.

“It’s something that technically needs to be done, and as we do it we pick up the cost of funding some of our needs,” Patrick said.

In other years, a $265 million tax expansion might be a flash point on Beacon Hill, but it is just one-eighth of the almost $2 billion in new revenue for which the governor is asking — and is overshadowed by other proposed tax changes.

Patrick declined to say whether, as he has said of other parts of his plan, he would be willing to negotiate the new software tax.

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