BOSTON — A broad coalition of businesses plans to file a citizens petition on Wednesday that would roll back a new tax on software services. They say the tax could cost them more than a half-billion dollars and put a brake on the state’s growing innovation economy.
The Legislature enacted the new 6.25 percent software services tax on July 25. It went into effect six days later, catching by surprise many who will likely be affected.
That includes IT executives, independent software and website designers and their clients in a wide array of industries, from health care and biotech to financial services to retail.
“It’s not drafted by anyone who knew anything about software. Having read it, that’s the case,” said David Friedman, president of Boston Logic, which provides website applications to the real estate industry. He attended an IT forum Tuesday in Boston’s Seaport District, which is home to many startup IT companies.
Friedman said he’s still trying to figure out what he calls the law’s confusing language about exactly what software work is or is not subject to the tax. But he said it could easily cost individual customers hundreds of dollars a month, and if the bills are too big, he said, some tech companies may opt to move to a lower-tax state.
“It’s a real consideration,” he said. “There are some very big software companies here that are going to wonder what to do about that, and it could cause some companies to relocate, very realistically.”
Other IT executives say the same, and some heavy-hitters are signing on to the initiative petition against the new tax. Signers include executives from the Massachusetts High Technology Council, Staples and BJ’s Wholesale. The Springfield and North Shore chambers of commerce are on board.
The initial petition is going to the state attorney general Wednesday. But the big effort to get the thousands of signatures needed to put the issue on the 2014 statewide ballot will be spearheaded by the Massachusetts Taxpayers Foundation. Its president, Michael Widmer, argued that while lawmakers expect the tax to raise about $160 million, it’s so broad, it will raise at least a half-billion dollars.
“This is a direct tax on investments made by thousands of companies across Massachusetts doing exactly what we encouraged them to do: innovate,” Widmer said. “Only now we are saying to them, ‘You innovate and we are going to put a 6.25 percent tax on you for doing that.’ ”
The business community should have been ready, said Sen. Stephen Brewer, of Barre, who co-chairs the Legislature’s Ways and Means Committee. There were seven hearings around the state on Gov. Deval Patrick’s proposed budget, he noted, which included a wider-ranging version of the tax. And Brewer said revenues are needed to help pay for transportation projects supported by the business community.
“We feel very strongly in support of the innovation economy,” Brewer said. “But many of those employees that would be utilizing the innovation economy need to get from their residence to their place of business. It requires having adequate investment in the MBTA, in regional bus transportation, in good roads and bridges.”
Brewer said his committee sent a letter to the state Department of Revenue urging the narrowest possible interpretation of the measure. And if the language proves over-broad, he said, the Legislature can confine its parameters to make sure it does not raise more than was intended. But he still defends its logic.
“We decided that was a logical exposure for a very, very lucrative industry in the commonwealth,” Brewer said. “It’s in the multi-billions of dollars. And we do put sales taxes on an awful lot of other items in our society. They are never pleasant to do.”
It looks like the unpleasantness will now be drawn out. In addition to a well-financed campaign against the software services tax, opponents of the Legislature’s hike in the gas tax are gearing up for a repeal drive, too.
Together, both efforts could set up just the kind of political dynamic Democrats hoped would be averted when they rejected the governor’s $1.9 billion plan and went for a more modest package. In 2014, they could find themselves running for re-election in the midst of campaigns against taxes that they voted for.