Analysis: Mass. Tech Tax 'Most Burdensome' In The U.S.

Casting the state as out of step with the norm, the Massachusetts Taxpayers Foundation released an analysis Monday of state approaches to taxing computer and software design services showing Massachusetts’s new tax to be larger and broader than anywhere in the country.

The analysis was performed as the foundation and other business groups pursue repeal of the new tax either through legislative channels on Beacon Hill or with a 2014 ballot question. Passed this summer, the new tax is a cornerstone of the Legislature’s plan to inject hundreds of millions of dollars into the transportation system.

Beacon Hill Republicans plan to introduce legislation Monday repealing the so-called tech tax after a summit hosted last week by Gov. Deval Patrick with legislative and business leaders yielded no agreement to revisit the controversial revenue source.

“Repealing the tax would return Massachusetts to the mainstream of the 50 states. With Massachusetts losing 3,000 jobs since January, placing the highest tax burden in the country on innovation and technology – the state’s greatest economic strength – is simply bad policy,” MTF President Michael Widmer said in a statement.

The report found that no other state taxes as many computer and software design services at such a high rate as Massachusetts does now under a new law enacted to generate $161 million for transportation by applying the state’s 6.25 percent sales tax to the services.

Four other states - Hawaii, New Mexico, South Dakota and Connecticut - tax computer and software services at lower rates. Hawaii, New Mexico and South Dakota actually tax all professional services, which are exempt from sales taxes in Massachusetts, while Connecticut taxes select professional services at 6.35 percent but applies a reduced 1 percent tax rate to computer services.

Of the 40 other states with a sales tax, none tax computer system design services.

Making the case for repeal, the report also highlights other states that have abandoned similar technology taxes after walking the same path Massachusetts lawmakers are pursuing. Maryland tried to implement a computer services tax, but it was repealed before taking effect less than a year after becoming law due to public opposition, according to the report.

Pennsylvania repealed a similar tax in 1997, and states like Hawaii and New Mexico that do tax computer and software services also offer high technology tax incentives.

The new Massachusetts tech tax applied the sales tax to 10 new categories of computer and software services, including computer system design services; services related to the planning, consulting, design, and integration of computer hardware and software; and services to modify, integrate, enhance, install, or configure software.

Patrick said recently that he has spoken with tech industry leaders who were relieved after the Department of Revenue issued guidance explaining that the “cloud” and open source software would not be taxed under the new law, but acknowledged the potential hit to Massachusetts’ reputation as a growing hub of tech innovation was “worrisome.”

Massachusetts has also taxed upgrades to prewritten software since 2006, which is the only application of the sales tax that most other states – at least 23 – also levy on the technology services industry, according to the foundation.

In defense of the computer services tax, Democrats in the Legislature have said revenues from the new tax will pay for investments in education and local aid, promised to limit the scope of the tax if it produces more than $161 million, and said the new tax is smaller in scope than one proposed by Patrick.