BOSTON In a quick aboutface, state legislative leaders are joining Gov. Deval Patrick’s call for repeal of a software services tax that was enacted less than two months ago.
After the so-called “tech tax” was passed, business leaders, including some new players, went to work against the law.
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Patrick first proposed the software services tax back in January. The goal was to tax new revenue streams created by the “innovation economy” — website design, smartphone apps, custom business management programs. Patrick wanted to raise more than $300 million, but lawmakers ultimately passed a bill they said would raise only $161 million.
The state’s tech sector hated it.
“I don’t think anyone sat down and said, ‘Let’s pull a fast one on the software industry.’ But that’s what it felt like,” said Brian Cardarella, whose two-year-old custom software startup, Dockyard.com, is just two blocks away from the State House. But like many in the field, Cardarella says he was caught by surprise when the confusing tax went into effect July 31.
“Everyone is reeling from this right now,” he said. “Everyone has a little whiplash right now from how hard in the head they were hit with this.”
Cardarella put his expertise to work against the tax. He created a website, BeaconHillblitz.com, that made it easy to contact legislators to urge repeal of the tax. Other repeal websites popped up as well.
And pressure came from Massachusetts heavy hitters, such as executives from BJ’s Wholesale Club, Staples and Boston Scientific. They joined forces to seek a statewide vote for repeal in 2014 — just when many Democrats who voted for the tax will face re-election.
Michael Widmer, of the Massachusetts Taxpayers Foundation, is part of that group. He says once lawmakers took a closer look at the tax, they saw it could cost far more than they intended — as much as half a billion dollars, he says.
“In the end it was the reality of the scope of this tax and the fact that it was really directed at the heart of the Massachusetts economy and would have damaged the economy in a major way for years, if not decades to come,” Widmer said.
Last week, Patrick, House Speaker Robert DeLeo and Senate President Therese Murray met with business leaders, including some small software companies, to hear their case.
Andrew Singleton, CEO of Assembla, which helps software designers collaborate online, says the group really woke up when he explained just how far-reaching the new tax could be.
For instance, he said, every time a firm like his makes routine updates to software bought in Massachusetts it would now be taxed, or, in his term, “contaminated.”
“We’re going to be working on that website and improving the result every single day for years,” Singleton said. “And this was actually a new idea to the Department of Revenue. They had assumed that this tax would be applied when the software was sold and it would be modified and then it would be done. So this logical problem with contamination actually made a big impact.”
By early this week, Patrick said he supported repeal. And Thursday, Deleo and Murray chimed in. DeLeo says he was worried that Massachusetts’ reputation as a tech-friendly state had taken a big hit.
“There was a grave concern … that we were sending a message to the innovators in this country and across the world, for that matter, that Massachusetts might not be the place to be,” DeLeo said.
Deleo and Murray say they will not support raising any other taxes to replace the estimated $161 million that would be lost with repeal. Instead, they say they may tap the state’s rainy day fund, and better-than-expected tax collections so far this year would also help to make up the difference.
This post was updated with the All Things Considered feature version.