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tax is not repealed, it sets a precedent which other states or legislative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.
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.
