Monday, August 12, 2013

"Tax"-achussets targets IT Industry with new "computer services tax"

Governments have been taxing citizens since the days of the Egyptian Pharaohs. Over time, governments have levied taxes to raise funds to operate the government, be it for military protection or domestic services. Rates rise and fall due to the state’s needs or political agendas in play. Taxes have been known to start riots and wars, such as the Magna Carta and the American Revolutionary War. In modern times, there are no shortages of controversies as governments levy new taxes against its citizens.

On Tuesday July 24, 2013, the Massachusetts state legislature passed an $800 million dollar transportation finance plan to fund statewide highway and transit needs. While the legislation increased existing taxes on items such as gasoline, a new tax was created called the “computer system service tax”, which applies the state’s 6.25% sales tax to computer services. The new tax is expected to generate $161 million per year, and applies to a variety of technical services provided by those in the IT industry. Some examples include:
·       Installation of “prewritten software”, for example re-installing Windows 7 onto a customer’s PC
·         Installing a packaged software suite such as QuickBooks onto a customer’s computer
·         Web based software/applications operated by a company within Massachusetts
·         Networking computers together on a LAN
·         Installing software patches (enhancements) on already installed software products (i.e. Microsoft product updates/security updates, antivirus software updates)

Oddly, the tax does not apply to the installation of Open Source software because there is no transaction to acquire that software. However, if an IT Professional is engaged in website development and uses an open source template to build the customer’s site, then the services are taxable. Confused yet? This also means modifying an existing website (content management) is now taxable, but website hosting and cloud storage are not taxable.

The tax singles out the computer industry, and those who outsource technology functions to service providers, be it individuals or corporations. This causes a number of problems. First, if the tax is not repealed, it sets a precedent which other states or legislative bodies could follow. Secondly, it hurts innovation. Companies may elect to defer upgrades and projects which would otherwise improve commerce. Thirdly, it encourages companies to defer maintenance such as the installation of new antivirus software or security updates on network computers when performed by consultants or contractors. Compromised computers and websites are often the source of malware infections for other systems, and encouraging companies to defer maintenance because of rising maintenance costs is a dangerous situation for everyone. Fourth, IT consultants and contracting firms already pay their share of income tax, as do the companies that utilize these services.

Targeting the IT industry will only impede the growth of the IT industry. The IT industry, like many others is diverse. It is comprised of firms small and large, from independent consultants to multinational firms. In some cases, a “computer services” tax will cost jobs. Small businesses could decide to keep certain tasks in-house, even assigning them to less than qualified personnel (the famous scope creep). While there remains a great deal of ambiguity regarding the law, what is clear is the losers are the IT sector and businesses within “Tax”achusetts.

Rather than waste precious legislative time (is there such a thing on the taxpayer's dime?), legislators could have studied where this tax was enacted before, namely to the south in Maryland in 2007. There, a similar outcry led to the repealing of the tax not long after it became law.