I was pleased to report the successful completion of legislative efforts to pass a transportation funding package. It represented the main product of the first leg of the legislative session and was a very necessary and difficult thing to do. I fully supported it and accept full responsibility for every element of it.
Unfortunately, it now appears that one element of the plan just doesn’t work well: The software services tax. A tax should, above all, be reasonably clear in what it applies to. People should not face difficult daily decisions on whether they need to pay a tax. It appears that the software services tax fails this test.
The new tax is levied in sections 48 and 49 of the funding package. These sections operate together to apply the existing 6.25% sales and use tax to
“the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party . . . and the modification, integration, enhancement, installation or configuration of standardized software” but not to “data access, data processing or information management services.”
The tax needs to be paid on these services when purchased for use in Massachusetts, regardless of whether the vendor is located in Massachusetts.
The recurring ambiguities that individuals and businesses will face include:
- When is one writing new software as opposed to modifying or integrating standardized software? For example, each page on a website like this one is based on a “template” which defines how the pages are all going to look. Creating a template is creating a separate chunk of computer code. However, that template only functions when it plugs into a standardized software package.
- When is one configuring a computer system as opposed to engaging in tax-exempt data access or information management? For example, a website is based on a database of text — think of a record where one box on the record might contain the text of a whole web page. A web developer is arguably engaged in the business of data and information management as opposed to the configuration of software.
- When is the software being used in Massachusetts? If you are a firm with businesses at multiple locations and purchase newly taxable services, you will have to determine how to allocate them to Massachusetts. This problem is not an entirely new one as purchasers of major software packages do already have to make that allocation as the packages have been taxable for many years. However, many major software packages are “open source” — downloadable for free — and not taxable. These packages always require installation and often require customization, services which will now be taxable. Many businesses will need to determine new allocations and compute, report and pay additional taxes.
In any given instance, the Department of Revenue, can take a position and answer a question about taxability. Some are hoping that we will get through a transition period and the protests will settle down and we will get on with the business of the Commonwealth. My fear is that the business of software development is so fluid that the conceptual boundaries may remain forever in flux.
And, of course, we have to ask: Why single out software services for taxation while leaving doctors, lawyers, accountants, dry cleaners and other service providers tax exempt? Software is not like cigarettes — it is not something one wants to discourage by special taxation.
But the big problem is not the money. The problem is the ambiguity of the tax: Most people really want to abide by the law and uncertainty is scary. Many of the players in the software industry are small businesses that can’t pay a staff of lawyers and accountants to sort the issues out for them. We don’t want to make Massachusetts a scary place for nascent information technology businesses — our goal should be exactly the reverse.
Business groups have already announced a ballot plan to repeal the software tax, which accounted for roughly 1/3 of the revenue funding the transportation plan. Sadly, the controversy about this tax has now created uncertainty about the funding of transportation itself — again, exactly what we were trying to eliminate.
When you are herding cats, the one thing you never want to do is change direction. Getting the transportation plan done was difficult for the legislature. Unfortunately, I do believe that the legislature should go back and revisit the transportation funding package this fall.