Proposed IT Services sales tax has bad consequences
As I write this, Massachusetts governor Deval Patrick is trying to persuade the legislature to approve a new tax that will charge any buyer in Massachusetts a 6.25% sales tax for the purchase of online services, programming services, or integration services. The issue may be decided in the next few days. There are many reasons that this type of targeted tax is bad, and as currently written, it will force small multinational companies like Assembla to leave the state. It’s important to improve the broad and clumsy language of this tax proposal.
I am generally in favor of giving the state enough revenue to invest in infrastructure. However, this tax is clearly a bad idea because it targets one industry. Economists universally agree that targeted industrial policy is inefficient and destroys jobs. Broad-based taxes produce less distorted investment and more jobs. This particular tax a blatant industry versus industry attack. It sounds like MA is targeting a clean, efficient and job-intensive industry like IT services to subsidize movies, health care, renewables, etc.
The effect on small multinationals like Assembla will be dramatic. If the tax is approved as written, we will be forced to leave the state. We aren’t alone. Many “cloud” providers have a similar structure. We purchase IT services, including hosting and programming, from all over the world. These are exactly the services targeted by the new tax. A very large percentage of our supplies would be taxed. Then, we sell our products and services globally. Neither the producers nor the consumers are in MA or using government services in MA, and the infrastructure provided in MA is basically a few desks. It would make no sense to funnel our service purchases through an MA-based company and allow MA to tax them. No company in the world would allow that kind of bug in their supply chain.
Michael Widmer of the Massachusetts Taxpayers Foundation has taken the lead in fixing this problem. He believes that the wording of the tax is just a mistake, and that the legislators didn’t intend to add such a broad tax. Patrick has said he doesn’t care. However, Widmer has proposed improve language that will limit the tax to true online services, “for consumption in the Commonwealth.” We should support his changes.
The obvious alternative is to increase the gas tax tax, which would be fairer, and more broad based. It gets paid by IT service providers, and anyone else who uses the roads. They are scared to do that. They could also eliminate movie subsidies, which pay $70/year to hollywood producers, for no good reason. The Mass Technology Leadership Council is the local lobbying organization that could provide a counterweight, but they have completely avoided the issue. Perhaps they are afraid that if they challenge Deval Patrick, he won’t speak at their events.
This legislation might affect the flow of startups. Statistically, most startups are bootstrappers, and software bootstrappers typically get started by providing IT services. That’s the way I do it. At a 6.25% cost load, the effect is very small, but it adds together with the rules on who can be classified as a contractor versus a full time employee (which are stricter in MA than any other state), the declining number of investors and acquirers, and other “east coast” environmental factors that have historically pushed non-health-related startups out of the state.
For perspective: It’s true that the “high tech” industry in MA has stabilized since the collapse of the big Route 128 companies and then the dot-com bubble. But, it has re-emerged as a smaller industry collapsed into Kendall Square. It’s smaller in employment. It’s smaller in the size of companies. Now a company like Hubspot is a big deal with 250 employees. DEC used to have 25,000 in one complex, and Lotus grew quickly to several thousand — much as Facebook did after it moved from MA to California. It’s smaller in geographic extent. Expansion to the “innovation district” a mile away is considered a big move. If you travel, as I do, and compare what has happened in MA with the global boom in places like India, Israel, Ukraine, Brooklyn, and Silicon Valley, where employment has doubled and tripled and quintupled in the same time, you can see how far MA has fallen in 25 years. MA considers itself lucky to maintain employment from decade to decade, with the small consolation of increasing average pay.
