The Software Services Tax

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 law has been on the books only three weeks, and the Department of Revenue, valiantly trying to implement the tax fairly, already has a list of 55 “frequently asked questions.”

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.

Published by Will Brownsberger

Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.

68 replies on “The Software Services Tax”

  1. Oh my! Talk about a confusing piece of legislation.

    I worked in IT for 30 years, and many of the projects we worked on would fall both into the taxable and the not-taxable definitions of this legislation. To tease it apart would require a WHOLE lot of record keeping in ways these project records may not be kept – are usually not kept.

    Aside from the tax itself, which is really a small part of it, the work to figure out the tax amount to be paid would be significant. That is assuming it’s even possible. . . . . this is very confusing.

  2. This seems unfair to a particular business sector. It looks very much like the long-ago-rejected plan to tax services. The complexity of the language masks the essence that what my tech support folks do (and now tax our small business for) is not really different from what we do (practice law), or what our custodial service does. We represent many small businesses providing services to clients/customers – some now must tax their clients; others not – based only upon what service they provide. I would vote for repeal. I expect that experts in “equal protection” might be looking at this, too, as presenting a Constitutional issue.

  3. Another question one might pose is “why tax services across the entire Commonwealth to fund transportation for perhaps 30% of the citizens?”. Why should a mom-and-pop furniture store in Holyoke pay tax for their software to fund operation of the T?

    Also, charging tax for the same software for a store in Nashua will make that store more likely to find a vendor in New Hampshire, because the Massachusetts legislature has put the Massachusetts vendor at a competitive disadvantage.

    It’s like you people don’t think about anything.

  4. Agree that this is arbitrary, confusing and seems to undermine the bill.

    I would strongly support repealing this portion of the package.

  5. Please support Senate Majority Whip Karen Spilka’s repeal of the Software Services tax.

    Complicated taxes should not be enacted with only 7 days lead time. This broad-reaching poorly written legislation is a disaster.

    Regardless of its intent, the definition of “service” under this law includes all software development, and undermines the fundamental viability of software service companies in Massachusetts who compete globally.

    The bill was not fairly or transparently reviewed by the public or the businesses most adversely affected, and to make matters worse, implementation is being rushed without proper preparation. As the CFO of a small Software Services company, I speak for many similarly situated software professionals, when I say that it is hard to believe that our elected officials would so cavalierly enact a tax with such a deep impact on so many small businesses.

  6. I’ve always been a big fan of taxing things that the money is going to. If you want to fix the roads, tax things associated with the roads(gas, tolls, registration fees, etc). If you want to fix the T, place taxes on things associated with public transportation. I hate taxes as much as anyone, but more so I dislike taxes on services and items to pay for some other, unrelated thing. Services cost money. Road maintenance costs money.

  7. And of top of everything said so far, can you imagine what and DOR audit of this would look like!! Sheesh! What a waste of time and money for both the businesses and the DOR. Repeal this disaster.

  8. I realize that there is a propensity in MA to tax and spend, without the awareness that businesses hire the people, who pay taxes. If you make it less economical for companies to do business in the state, they will just go elsewhere. I think this was a program that was rushed to appease the governor.
    Mike Widmer is one of the most respected and trustworthy people in the state, someone you know from his work in Belmont and if he makes the following statement, you can 100% sure that he knows what he’s talking about.
    The following is from the Mass TaxPayers Foundation:
    “On the forefront of this issue is Michael Widmer, president of the Massachusetts Taxpayers Foundation. Widmer concludes that if passed, the repeal of the state income taxes would be a blow to the Massachusetts economy. “Even if all 67,000 state employees (judges, professors, engineers, police officers, just to name a few) were laid off that would only account for $5 billion of the $12.7 billion,” said Widmer.
    This is another poorly thought out tax and companies are not going to sit around hoping that the state legislature changes its unfriendly attitude towards business. It needs to be changed now!

    Jim Fitzgerald

  9. Senator –

    Your thoughts are sincere and considered, and that is a good thing, all on its own.

    There are many avenues for responses.

    1. I will be working hard in my industry for repeal of this tax. I am not interested in a fix.

    2. There is an “insult” factor that you left out. The transportation system has some of the least productive workers in this state. Look at the MBTA pension data that was forced out of secrecy. Look at the Pioneer Institute’s analysis of how overpriced and overstaffed our bus maintenance is. Look at how we overpay for prevailing wage on construction work for transportation projects when the state has said publicly there is no difference in quality. There are other examples of waste. Taking money from the most productive and innovative workers in this state (we even buy and sell services among ourselves) and handing it to the least productive and innovative workers (MBTA pensioners, unionized construction workers and bus mechanics) is not only bad economics, it is outrageous to us.

    3. I think the tax shouldn’t have started broad and been narrowed. It should have been a very specific set of situations that grew. So, when you guys meet to discuss changes, I would not start with the language in the bill, but with a list of real-world examples of firms and freelancers in this state, and then saying that everything else is exempt.

    Lastly, thanks for hosting a sincere discussion on this website, and I enjoyed you pointing out that the people who created and delivered this very site to you would face uncertainty about the tax.

  10. I think the problems with this SW tax are well articulated by Will and the other commenters. I invest in start-ups. The founders live on the edge, keep salaries low, pinch pennies, and the only tax they pay is payroll tax and sales tax (on office items purchased). They don’t pay income tax until they are profitable, which is usually many years down the road if they don’t fail first.

    Most startups are software companies. So, with this legislation, I believe MA becomes the first and only state to tax startups beyond payroll and sales tax. I wouldn’t be surprised to see software startups heading for NH and RI. Was it really the intention of the legislature to impose a tax, and/or a heavy administrative burden, on software startups? I doubt it – to date this has been a start-up friendly legislature.

    My understanding is that this part of the transportation bill was hastily drafted, and then passed under the false claim by proponents that many other states had a similar tax. Embarassing! This feels at best arbitrary and at worst sneaky and back-room.

    Usually, MA state statute language is quite clear, precisely reflecting the intent of the legislature after full debate. This is far from that high standard. Will, you are smart to recognize its flaws, and I hope you colleagues in the senate have also realized it won’t survive a ballot initiative and needs to be completely overhauled.

  11. So as I understand what you are saying about this tax is that each time you modified this (eight times as of this writing)you should be paying a tax on the full value

    I know how difficult it is to write legislation , I have done it and although it was only changes to a current law I quickly realized how difficult it was to look at all the different angles. This looks like it was not written well and as someone else said – a seven day lead time is insufficient to really work out the bugs.

    More than anything I am concerned that not enough is being done to reign in some of the expenditures of the state and that adding taxes is route of least resistance and work. (sorry Will but it is how so many of us feel)

    We heard the Governor talk about the tolls coming down on the mass pike which is why the 3 cent tax on gas was needed , now we are finding that tolls on the western part of the state are going back up. This is starting to look more and more like the old shell game. Software development is a major industry in Massachusetts , Take Orical in Bedford as an example they have a huge complex and thousands of employees , do we want to chase them out of the state like we did Raytheon and Fidelity

  12. Senator Brownsberger,

    You’ve explained the issue perfectly. It is not possible for the DOR to narrow the tax based on the notion of prewritten vs custom made software. The only place I can think of where there might be no prewritten software combined with custom software might be the NASA Mars Rover, and even then it’s unlikely.

    That said, I don’t think there’s any way to narrow the tax by any means. So, if there had to be a tax, it should consist of one line only:

    billable hours are taxable.

    The cost issue should not be ignored. While perhaps a Geek Squad technician might spend a few hours fixing someone’s network, there are also those of us working on contracts that span multiple years and are budgeted for 100s of thousand of dollars or more. To add 6.25 percent to that cost could well send the client looking elsewhere next time. And my concern right now is my existing contract, already negotiated, with a new 6.25 percent tax on it. What if the client says ” I’m not paying it- it’s not part of our originally budget deal” – I can litigate, but that’s just going to cost me money and the client. I have to eat the tax if the don’t pay it.

    So, I think is wise to remove the tax completely, and raise the gas tax ( the current increase is < 1%)

  13. The software tax sends a terrible anti-business message and encourages the type of non-productive legerdemain that is endemic to these targeted taxes. If transportation is so essential, pass or increase a broad-based tax on everyone or, ideally, on the users of these improvements.

  14. Senator –

    Some good stuff that you haven’t heard elsewhere:

    Myself and other computer programmers sometimes actually try to modernize our outdated, often late and broken down transportation system ourselves.

    So, for instance, in 2009, I was at a volunteer open government “hackathon” project in your district – at BetaHouse in Cambridge – with others who wanted to take transportation data and create free mobile apps that anyone can use.

    One great free one is OpenMBTA – who my friend Daniel Choi spent a lot of time creating in his spare time.

    Dan lives in your district also, and spends a lot of his spare time trying to improve how government (and specifically transportation) works for everyone else.

    How does he feel about being taxed and collecting taxes for a system that refuses meaningful modernization – a system that he volunteers to improve?

    I will ask him and point him to this page.

    The open government / open source movement is very popular in this state and there are volunteer efforts that we programmers engage in – sometimes even in *your district* – to improve the lives of many other people.

    Still think we’re the people you want to tax?

    (That all being said, I will tell people that it is time that we, the tech sector, educate our government about all that we do, since it is usually unknown.)

  15. Will – I’m assuming (and that’s always bad) that this tax is aimed at out-of-the-box technology providers, for instance, when I pay Best-Buy to install MS Office on my new PC – can you confirm? Another possibility is when I hire someone to come in and install a server at my small business and put in an IP based phone system. If so, I don’t understand the logic – the providers located in MA are already subject to income tax, I’m assuming they would get to deduct the sales tax from the income tax, so the clause is pretty much tax neutral, it just adds burden to bookeeping (and as you point out, how the heck do you classify these things? Does this apply to ATT and my iPhone (after all, it’s really a computer). Echoing other sentiments here – why the heck is the state discouraging two of the things that make us strong?

    Re the specifics – the answers themselves are nonsensical “A: Generally, service technician charges for determining why a customer’s hardware orsoftware is not working properly
    are not taxable. This may include reinstallation of software that was already on the customer’s computer. If additional
    hardware or software is provided to the customer during the service call, the rules in 830 CMR 64H.1.1, Service
    Enterprises, apply. If the service technician sells the customer a subscription to prewritten software, such as antivirus
    protection, those charges would be subject to the tax on prewritten software.”

    Jeesh, how would I keep track of what’s a new install of MS word, vs a reinstall?

    This is one of the more misguided pieces of legislation I’ve seen.

    I also like the intent to tax license fees as if they were service fees.

    I’m curious there must have been an author – who actually proposed this monstrosity?

  16. It does sound like an unnecessarily complicated tax and somewhat unfair in that other services (legal, business consulting, etc.) are not taxed (they are in other States, BTW). I would be OK with repealing it but ONLY if substituted with a replacement tax. Keep taxes in the same area, transportation, by raising the gas tax more, which is still lower (in constant dollars) than the last time is was raised in 1992.
    To the person who asked why should a family in Holyoke pay any tax going to the MBTA; then I can say why should I pay tax to fix a bridge in Holyoke”? These are kinda dumb questions. If the Commonwealth is going to provide transportation, then it should be provided for all. The alternative is for every street, road, bridge, train and bus ride to have a toll that covers its costs. This would be fair but way inefficient.

  17. As a self-employed website designer and developer I also support repealing this tax. It’s confusing as to what would be taxed, who pays the tax (the client/website owner or the one who creates it) and puts a burden on individuals such as myself.

  18. My feelings about this tax are made elsewhere in this forum, I support rescinding the bill so that it can get refunded properly. However- I do not have faith in this government to do the right thing. Take it back – redo it – and allow the public to react on the the funding of this bill. It’s not just the Services tax that is problematic- but, that is a monster problem that really needs addressing now- not later.

    The other problem with this tax is that it makes me side with Anti-tax Republicans-and my Teaparty friends all liked my FB complaint about being taxed unfairly. That’s really strange because I’m kind of a red-tinged green as far as politics is concerned.

  19. I know I’m going against the mainstream of commentary here, and that I’ve said this before. But we live in a service based economy – yet our tax system is based not on services but on products, which are a shrinking sector. And any new tax always gets criticized on the grounds that it will produce disaster in some form, or thwart creativity, or be burdensome to someone.

    So fix the thing, don’t repeal it altogether. And if it’s repealed altogether, how will the missing funds be made up?????Or will we just let transportation fall further apart??

  20. All else equal, there’s good reason to have several smaller taxes instead of one bigger one: it tends to create less incentive to avoid the tax by altering your behavior. When a tax changes people’s choices of what to consume, it causes deadweight loss. That is, the consumer’s loss of value is greater than the money the government collects. So if you can tax goods and services both when they’re produced and when they’re sold, that’s likely to be more efficient than collecting the same amount of tax all on production or all on sales.

    Likewise, it’s usually better to tax everything equally. So in particular there’s a reason to have the sales tax apply to services as well as tangible goods. If the same consumer whims can be served by selling a tangible good or by selling a service, we should do whichever really costs less in terms of the labor and resources it takes, not whichever costs less in terms of money because it avoids a tax.

    But I don’t see any reason to single out some services to apply the sales tax to, while leaving others untaxed at time of sale. And almost any change of law should give some lead time to let agencies figure out how best to enforce and people how best to comply.

  21. This tax should be repealed.
    I do not understand what software tax has to do with the transportation. The projects like this should be either funded from the transportation related income flows (tolls, fees etc.) or from the general budget. From my and many people perspective it looks like an attempt to hide taxation increase from the electorate public (… the bill voted for by representatives/senator was just transportation-related… nothing to worry about…). The government should have the courage and obligations to treat its electorate as adults, only then we can be required to behave like ones and accept that more services will beget more taxes.
    Just when Mass seems to have reversed the trend of software industry moving out of the state this may just revive the trend.
    I write so-called embedded software which is just a part of a system which includes usually mechanical and electric parts. In addition my company sells really design services, we manufacture designs mostly. There are usually 3-rd party software incorporated and our clients may or may not reside in Mass. We may or may not manufacture some prototypes. My head spins when trying to find out if the law is applicable or not.
    I work for an US branch of a company which is UK-based. US operations is much smaller office and would take not much to move all the firmware effort back to UK instead of burdening the whole project process with considerations what applies or not, hiring additional accounting power etc etc etc

  22. Naomi,

    It cannot be “fixed”. It cannot be narrowed down, because software is too complex in its construction to try to target some subsection of the industry.

    So you can tax ALL services ( like Canada ) or raise the gas tax.

    The current increase in the gas tax (3 cents) is < 1% the price of a gallon of gas. Raise the tax to 5 or 6 cents.

  23. Will,

    I think you know I am a fan, but I am absolutely outraged at this legislation that was passed with minimal notice and lack of thought and input. I am also very disappointed to see that you voted for the bill.

    As a freelance web developer working with small business clients, I find what I read about the provisions of the bill to be exasperating and confusing. Not to mention unfair. I would maybe be ok with this if other professionals (attorneys? accountants?) were also now required to charge sales tax, or plumbers for that matter, and plumbers can even charge more than I do. Why I and my peers were singled out for what I consider to be a discriminatory and unexpected burden on my business and my clients is unclear.

    There were only 7 days between passage and the effective date; what is it going to take to undo it, and how long will that take? And will you work for its repeal before it has too much of a negative impact on affected businesses like mine?

    I now apparently have to spend my time going back to clients whose projects I have already started and ask for more money instead of doing productive things, or call my accountant and pay him to figure out what I need to do to comply with this, assuming he can tell me what part of my work is taxable and what is not based on the information that is out there. This is my livelihood and this is personal and I am being singled out and do not like it.

    Barry Tuber

  24. I checked with Sen Brownsberger’s office, Rep. Rogers’ office and my accountant to see if my work was covered by the new tax. (I’m a consultant who does user interface design for software products.) I read the new law and I read the DOR’s TIR (if that’s what it was called) and the FAQ.

    My concern wasn’t whether it was fair to tax my work, but whether I needed to charge my clients the tax.

    I was astonished reading all of the official documents. Terms were undefined or poorly defined. It didn’t seem that people involved in drafting or reviewing the legislation or DOR documents talked with anyone in the industry. And the point of view seemed to be: get the bill passed and figure it out later. As others have said, a 7-day period between passing and implementing the law is ridiculous.

    So I wrote to the DOR, describing the work that my colleagues and I do, and asked if we were covered. Item #44 in the DOR’s FAQ is my text, taken from my email to them. I was glad to hear that my work is excluded.

    That’s nice, but the process stinks (to be frank). New laws should be crystal clear when they’re implemented. The idea of passing a law and waiting for the DOR to interpret it and issue regulations is nonsense.

    People had to follow the law on July 31, but it was impossible. So irrespective of whether this tax made sense, the process needs improvement. This sort of thing cannot be allowed to happen.

  25. I agree with those who agree the software tax should be repealed; that much of the problem lies with inability of the MBTA to manage its costs. In addition, I want to offer two factual corrections and make one economist’s point.

    The economist’s point is that in a 21st century economy, software is a form of business investment, and to tax investment – the engine of growth – as opposed to consumption is an anti economic growth policy.

    Factual points requiring correction:

    1) The statement “It now appears…..” is misleading. Mike Widmer of Mass Taxpayers Foundation made all the arguments against this tax months before it came to a vote. Our representatives chose not to listen.

    2) A 6.25% tax on REVENUES, as opposed to profit, is not a small tax. This is not just a problem of clarity. Since the software industry is quite competitive, this tax is likely to come out of the revenues of the software developers (“Incidence” in economic-speak) so it could easily amount to a 30% tax on profits.

    Liz Allison

  26. I love the term “prewritten” software. It reminds me of something I would see as bad usage in Strunk & White.

    I’ve been writing software for nearly 30 years now, and never heard that “word”, if it is one, used before.
    Let’s see, there’s pre-cooked food, but, that’s just cooked food.

    There’s chewed gum, and is that the same as pre chewed gum? I guess I don’t have a pre owned Lexus so these things sound funny to me.

    Of course, it seems that the mass legislature outsources their computer maintenance to CGI, which I believe is based in Montreal, Canada.

  27. Add my vote to repeal the tax – too confusing. I’m happy to pay more for a gasoline tax, instead!

  28. Will,

    First off, for background, I’ve worked in the software industry for 23 years. I now work in “Big Data”, analytics and “software as a service” (SaaS).

    You say the problem is the ambiguity of the law. It strikes me that the problem is the ambiguity of what the tax applies to. In other words, first you need to define what it is you’re going to tax and even software experts will have a hard time with that in all cases. You allude to this with your statements about templates and so on. However, data in a database is, arguably software and often actual code and stored in a database (and in my company’s case, the code is written by customers and stored by us).

    Further, especially with Software as a Service (think of companies like Salesforce), the site and hence the software are changing at a very high frequency. Weekly isn’t unheard of. How is a company supposed to keep track of these?

    I’d argue that the legislators are completely out of their element in trying to understand all this. I’m not saying they’re stupid but they’re trying to tackle something that’s just much too complex to be legislated in a way that anyone will be able to understand and in a way that taxation can be applied in a fair and reasonable way.

  29. Will,

    I have to give you credit for admitting that the software services tax didn’t work out well. What did you expect? It’s clear that the author(s) of that part of the legislation had no idea what they were doing. Unless, of course, their plan was to damage the software industry in Massachusetts. If that’s the case then it’s brilliant.

    Why tax some services and not others? According to the DOR’s “A Guide to Sales and Use Tax” page ( Accounting, insurance, legal and medical services, as well as services such as haircuts and car repairs are not taxable.

    Why are those deadbeat accountants, insurance agents, lawyers, doctors, barbers/hairdressers and auto mechanics getting a free ride? Most of them commute to work by car, thus burdening our transportation system. Some of them can telecommute, but I doubt very many actually do.

    If the legislature feels it necessary to enact a foolish, counterproductive tax, why not spread the burden to *all* service providers? Tax billable hours, period. That way it won’t just be one industry fleeing the state, it’ll be all of them. You can’t get any fairer than that.

    While we’re at it we could tax the writing of legislation. It has many similarities to software; it’s complicated and expensive, and if poorly written guarantees years of upgrades and bug fixes. Not to mention all the *other* services people require to try to understand it, all of which could also be taxable.


  30. I am completely mystified as to why legislators keep trying to tax software services! I practice what’s called ‘agile development’ in that I’m constantly involved in a “soup” of discussing projects with customers, implementing those designs using an off-the-shelf database package known as FileMaker Pro, then training them, fixing bugs, adjusting features that I implemented previously to improve usability, etc. Sometimes, I literally spend one minute on one kind of task in the middle of another one.

    For example, in the middle of training someone, I discover a ‘bug’ (something I forgot to do during implementation) and I can fix it on the spot within 60 seconds (literally) while the person watches. Then we continue with the training.

    How will I ever figure out what to tax and what not to tax? It’s impossible! I am self employed and must do all my own bookkeeping, etc. I already have to pay a tax accountant just to file my federal and state income tax returns each year. I can’t imagine what it would cost me to pay that firm to straighten out how much sales tax I might owe.

    Please rescind this provision, immediately, retroactively, and completely. If the legislature must tax services, then there should be a tax on ALL services, starting with lawyers and doctors and all the way down. Of course, lawyers will NEVER vote to apply a tax to their own services, and at least 70% of the legislators in Massachusetts are lawyers, so this idea should be DEAD IN THE WATER.

    I wish that the governor’s original idea, of adjusting the sales tax down, the income tax up, and the income tax standard exemptions up would have flown. Even at some adjusted percentages (if the legislators had reasoned that the overall burden was still too high).

    Or better yet, if it’s all about transportation, then gosh, what about taxing each mile driven by all cars and trucks on our roads and highways? OK, that’s perhaps an extreme technological challenge (such as, does it depend on where the vehicle is registered or where it is driven, such as an out of state truck that travels into our state and then back out, pounding our roads and bridges into dust as it goes, leaving us to repair it all, etc.).

    Let’s put on our real thinking caps and come up with something that makes more sense than this, please?

    Or is the state legislature bound for the same destination as Congress in Washington? Slow decline? I have to hand it to you, Will, for running for Congress and trying to go down there (to Washington) and trying to make something sensible happen there. I don’t have high hopes, but whatever you can accomplish (I know you’ll win!) I thank you for in advance. If you need a shoulder rub when you get back to Massachusetts, please call me. With all the stress down there, you’ll probably need it.

  31. Having been a professional engineer for 50 years, I see the definition of software as now reducing to the “human ability to change the properties of an object by typing, talking, or using a pointing device.”

    Historically, hardware was very difficult to change and required soldering iron, hammers, and screwdrivers, while software was designed to have its properties changed with a software interface. Configuring a remote control for home theater is programing the device; an alarm installer programs the device for his customer; configuring your home computer for kids is programming; the auto mechanic programs properties of your car.

    Almost every modern product is designed to have changeable properties. The change process modifies a set of instructions that then change the devices properties. The change may start with a button being pushed and that then generates a script or data, which then gets executed by a computer. The script is the software program, and the button is the means to program it.

    We cannot have tax on something that has no definition. Everyone is now creating software.

  32. Will,

    Sorry for the tone of my previous post. It was late and I was tired. Not a good time to comment on something that makes me angry.


  33. I’ve read through all the comments down to here. Collectively they reinforce my conviction that we did make a big mistake and we need to fix it. I did cosponsor Senator Spilka’s repeal bill. But we need to do more than that — we need to go back and put some additional revenue back in the transportation package.

  34. Gas tax + 2 cents ?

    @ 5 cents would be just over 1% of the price of gallon of gas.

  35. There are no cuts that can be made in other areas?

    I believe you know my opinion on taxing people in western MA to support the MBTA.

  36. In the same venue the legislators could also start thinking of assessing a tax from the profits from the sales of publication on the include citations!

  37. This provision needs to be repealed and you need to take another run on funding transportation. The transportation package is key to economic development in MA, but the software tax is a terrible way to fund it, especially the way this provision was drafted. The legislature needs to step up to the plate and pass tax increases that do the job. Trying to single out one segment of industry to avoid negative reaction from the populace is very dangerous to economic development. If you do drive more companies out of the state, as is entirely possible with this legislation, you cut off your nose to spite your face.

  38. I’d go with a gas sales tax pegged to a percentage of the price, like every other sales tax – 5%?

  39. We should not overlook reforming the governance of the MBTA itself. All transportation decisions are made in a very tight circle of less than 1 mile that includes the state house (the purse strings) City hall (the iron fists) and the CTPS (Boston Centric Transportation Planning Staff). What we are given is a hub&spoke radial transit system that only serves those who work or live in boston. The system with minor changes like connecting the spokes out in the suburbs could serve so much more with the same resouces. This is where central planning falls flat on it’s face which happened in the Soviet Union and to some extent in South Africa with aparthied (we have geographic aparthied in public transit routing). Maybe we should break up T route planning and hand over a lot of it’s functions to the suburban RTAs. Until this happens we are stuck with an expensive system going that is going nowhere. A 19th century solution to a 20th century problem that does not serve the 21th century.

  40. The tax goes back to the Governor’s big January tax reform proposal, although in attempting to narrow the tax, the legislature may have created additional ambiguities.

    To be clear, the way the tax is written it applies equally to one-man shops doing installs and customization of software for individuals, to big box stores selling installation services along with software, and to big consulting firms customizing massive software packages for industry.

    Part of the problem in my mind with the tax is the way that it effectively requires small business to engage in time record-keeping that was previously unnecessary. What is worse is that it may be very difficult, in that record keeping, to track what work is taxable and work isn’t.

  41. In addition, some of us one person shops have specific expertise, and consult with companies on large projects, sometimes spanning multiple years. This adds 6.25 percent to the cost of those medium – large projects sometimes $xxxxxx.xx or more for a single project.

    This a a large actual dollar amount that my clients are going to push back on.

    If I can show irreparable harm – losing a large contract – I ( my company) may sue for the injunction alone. I have a bid out now. If I lose the job because of the sales tax, I may sue. Sound like irreparable harm to me.

  42. They are calling the software a tangible goods transfer. If that’s the case, they should tax lawyers, because a contract is a tangible good in te same way that software is. If I buy a “canned contract” online. It probably has sales tax. If it’s “custom made”, I’m sure the attorneys are modifying their own templates ( in fact I know they are) so it should be taxable then.

    Tax attorneys and accountants, and other types of tangible goods providers, and I might be willing to live with it.

  43. The Software Services Tax is bad for business in Massachusetts. I am an owner of staffing firm (a small business) in MA and since 1984 our firm has provided permanent and contract personnel placement services to clients across the country. The bulk of our contract employees are MA residents and work for clients here in MA. It costs us far more to employ a person in MA than it does in many other states including, adjacent ones.

    In the 29 + years we have been in business we have seen more and more work leave the state and the country—“outsourcing.” This tax encourages further exodus and will make MA even less competitive—even with its neighboring states. I think the legislature has overlooked the portability and virtual nature of jobs; especially ones involving technology.

    Larger companies have the ability to send work overseas due to economies of scale but smaller firms will get stuck with the tax—making it that much more difficult to compete. Businesses need to have profits to survive and grow. If a tax reduces profit or creates a loss we need to charge our customers more in order to survive and this is often not possible due to contracts. Why would a customer go to a MA company when they can get the work done cheaper by a firm in New Hampshire or better yet, India, Ireland, The Philippines, Canada, China or 34 other countries?

    I see this tax as a desperate effort to find more revenue when, in my opinion, the legislature should be looking at ways to save money, cut spending, reduce waste and fraud. Our economy is not great yet no one seems to realize that we need to make a sacrifices. MA has some of the most generous social services programs in the country: unemployment insurance (paying at one of the highest rates in the country), welfare, health insurance and more. I think these programs are very important and good in many ways but the reality is that they all cost money.

    I am proud to be a MA resident and to have built a successful business here that employs and has employed hundred and hundreds of people but customers cannot afford to pick us just because they like us- they will go elsewhere so their business remains profitable.

  44. Just trying to parse threw this stuff. I will probably have a more developed opinion later. At this point my gut reaction is that this will hurt the tech industry in Mass. I think it will scare away a lot of business and talent. Some lawmakers may be thinking that this won’t happen or at least it won’t happen in the near future because it’s hard for businesses to just pick up and move. (They are probably thinking in terms of traditional brick and mortar shops).  But this line of thinking is wrong. The difference between classic brick and mortar industries and IT Services is mobility. While it is difficult for brick and mortar companies to move around quickly and easily, it is easy for IT Services companies. 

    Let’s take a real example. A company in Burlington called Acquia makes custom websites and has about 200 employees. They make the websites for companies like NBC, the White House, and the President of USA. I can easily see this company moving across state lines to NH as a result of this legislation. It would be so easy for them to move because there is nothing to move. There is no heavy equipment to move or real estate to sell. The work of website development can occur anywhere there is an internet connection; most employees probably work from their home anyway. All this company needs to do is change their office address to NH and they just saved themselves 6.25%. 

    The law of unintended consequences.   While we may generate some tax revenue in the short term, I think the long term effects of this tax will result in the loss of IT companies, loss of talented developers, and therefore, the loss of the current and fast-growing technology tax base. Currently, Mass. is a top 10 state for technology. As a result of this tax, I see Mass. dropping to 25 or lower. This is a tough pill to swallow because we all know that the USA has been converting into a service economy for a some time. And it is crucial that Mass. stay on the forefront of this transition. This tax will cut the legs out Mass as a tech industry leader. 

    Thanks for listening. 


    Tony Spencer

  45. Yes, Sen. Brownsberger,
    Thanks for your support on this issue,
    Please keep it in the forefront of your agenda and don’t let it get sidetracked during your campaign for the House seat.
    It is important to speak up publicly about this.
    Taxing any services industry – especially with such generic specificity- is simply a bad idea.
    Meanwhile, the DOR is wasting valuable time and $$ trying to source this bad revenue.

    Benjamin Lowengard

  46. If transportation funding is in jepardy, as a last ditch effort, consider DOT for chapter nine discharge bid dig debt. Keep an eye on Detroit. We were foisted with that project. Maybe we should hand it back to the feds.

  47. i echo many of the sentiments here. taking away from a major engine of growth (via an ambiguous and not well thought out tax) to cover the mismanagement of the MBTA is ludicrous. Lack of revenue is not the problem. It is a symptom of a deeper problem within the public transportation sector. It’s like our lawmakers lack a basic understanding of economic principles.

    i also find it shameful that something so misunderstood with so many major negative consequences passed through the legislature. i don’t mean to be rude Senator B, but this shows a lack of diligence on the part of our lawmakers and makes me question the diligence you intend to apply to bills that will be covered in the US HOR that could have more far-reaching impacts into our economy and society. (Kind of like how less than 5% of our current US Congressmen fully understood what was in the PPACA, let alone the likely consequences of the myriad elements of such a lengthy bill, before making it law)

    I do appreciate that you’re trying to have a conversation on it now, but it would save time and resources getting it right the first time around. And sorry, but “it got by me” is not the most confidence-inducing excuse…

  48. ahscruz:

    w/o trying to start a whole new topic, but since you seem to feel strongly that the MBTA is mismanaged and that is the root of the financial problems, not lack of revenue, I’m very interested in hearing the areas that you think significant $ can be saved? Because, while I myself can note areas of poor management where $ could be saved, there will usually be some stakeholder that strongly disagrees and “forces” the MBTA to keep spending. For example, should the MBTA be the agency”subsidizing” the RIDE program to the tune of $100 million or should this be done by the State as a whole? And should MBTA stations be “manned” at additional costs? Should salaries be cut – employees = taxpapers = voters will disagree. Etc, etc. And in any case, the biggest problem (IMO) is that (approximately) all the fare revenue paid by riders goes to the banks as interest, the highest % by far in the USA. This is the ultimate mismanagement – burdened on the MBTA by the State! I would rather pay higher taxes for a few years to pay off this debt and stop “subsidizing” the banks to the tune of $443 million per year. Wouldn’t you?

  49. Will,

    Could you explain how the legislature makes the logical leap from “we’ve got a funding problem on the MBTA” to “let’s tax this one particular industry instead of services in general”?


  50. @alanmoore: MBTA, i meant MassDOT in general. and i wasn’t necessarily blaming the people at MassDOT specifically, but rather all stakeholders in transportation, which, yes include the voters. there are numerous areas where savings could be realized or revenue increased (seriously, i could name a dozen ways operational changes could vastly improve long-term financial stability of the system here in Ma). however, as you point out, there’s always someone out there who’s going to disagree.

    but at the end of the day, i elect my reps to be man enough to make the right decision, not the most popular one. e.g., an annual scheduled increase in fares tied to inflation (kind of like that newly passed gas tax…) would be very controversial and probably overall unpopular, but if costs rise every year with inflation, it makes economic and business sense that fares should too. and what politician would risk the political suicide of making changes to the RIDE program (even though this is also necessary)?

    you’re right, even if the MBTA could close its deficit every year, it would still be faced with a very high debt burden, especially when compared to other transit systems. although, i think you’re incorrect in equating interest paid on a debt as a “subsidy” to the banks. is your bank “subsidizing” you when they pay you interest on your savings?

    i actually do mind paying higher taxes if 1) nothing else is being done to fix the operational inefficiencies in the system that will continue to lead to more deficits and thus continued debt in the future and 2) if it’s into a transportation system that’s okay at best. i’d rather my tax dollars go to something else.

    of course, all of this is totally off topic and was not my intent. my whole issue with the tax law was 1)it was passed by people who didn’t bother to understand it, its implementation, and its consequences and 2) it’s essentially a transfer of precious resources from a very particular industry to an inefficient government-managed entity that’s in a completely different sector. excuse me for the colloquialism, but it is straight-up redonkulous.

  51. ahscruz: Thanks for your considered response. I should not have used the work “subsidy” when referring to MBTA debt interest to banks. I was just frustrated because I don’t understand why taxpayers are will to pay higher taxes in the long-run to pay interest on State bonds (and enriching the banks – which just had one of their most profitable years) when we would pay less taxes if we simply taxed ourselves as necessary to pay for what we want/need. Same thing with the huge ($3 billion I think) accelerated bridge program which is all (I think) bonded money. And the Big Dig – it cost $16 billion plus another $5-6 BILLION in bond interest that we are still paying! Maybe someone can explain the (il)logic in borrowing when we can simply pay (less over the long run).

  52. alanmoore: haha. that’s so true! i think a lot of it has to do with the natural myopia of human beings. but i also think it’s politically easier to pass some of these projects if funded through bonds than through higher taxes. can you imagine if every time you wanted to build a bridge you had to bring up the idea of a tax? as you say, it’s a tax burden either way, but most folks don’t know that. that’s a sad reflection on both the politicians and the taxpayers. politicians, because they are going for political expediency and the taxpayers for not understanding the ramifications of what they are voting for.

    still, there isn’t enough taxpayer money to cover all these (concurrent) projects and there are consequences to high taxation as well. thus, in many (if not most) cases, it makes sense to use debt to fund these capital improvement projects ASSUMING these projects can generate some type of return (whether social or financial) on investment and not add to the debt burden once completed. and assuming the true cost of the project is accurately figured out upfront. (how much over was the bigdig?) this is not the case with most projects, which is why we end up seemingly paying more on the backend as opposed to the front end. but i don’t have a public finance background so this is all just my opinion.

    as much as I complain about the MBTA, i will say, it does seem like it got “screwed” with the BigDig. But that opens up a whole new topic of government mismanagement and waste in overseeing capital projects, which is also totally off topic here : )

  53. The thing about Massachusetts that I don’t understand is the legislature reacts counterproductively to any revenue problem. Instead of looking at projects that can be put on hold to free up revenue to pay for urgent priorities before resuming, They pull out the plastic and charge it, pay a little down and over the long term pay a lot more in interest costs. I think we can live within current revenus streams. If we can’t, use the tools at hand that capitalists use. DOT is a poster child for chapter nine bankruptcy. That would force a pay as you go paradyne. The legislature would need to define the projects, get absolute cost bids, save up for it in mini-rainyday funds, get the work done and pay the contractors out of the fund at completion. And if managed right the funds on deposit could possibly generate small amounts of revenue for, not burden taxpayers with interest costs.

  54. Views from the Inside: ‘Repeal the software services tax’
    Sen. Karen Spilka shares her views from the inside on the software services sales tax.

    Sen. Karen Spilka shares her views from the inside on the software services sales tax.

    Senator Karen E. Spilka, Co-chair, Tech Hub Caucus
    Tomorrow, Governor Patrick will meet with Speaker DeLeo, Senate President Murray and a group of Massachusetts business leaders to discuss the problems created by the new software services tax and to develop a plan going forward.
    Contained in the Transportation Finance Reform bill passed by the legislature earlier this session, the software services tax extended the sales tax to include “computer system design services” and “the modification, integration, enhancement, installation or configuration of standardized software,” effective July 31st.
    After many conversations with constituents and other technology business owners across the state, I am deeply concerned by how this new policy will impact the tech industry, especially small businesses. In a state that prides itself on a thriving innovation economy, this tax is excessively burdensome. As chair of the Tech Caucus in the legislature, I am proud to be fighting for its full repeal.
    Once this tax went into effect, my office was flooded with phone calls and emails from tech industry leaders – in particular small business owners – who were deeply concerned with the impact the new tax would have on their ability to sustain and grow their companies. When our leaders sit down to discuss the impact of this new tax, they need to be especially mindful of what is happening to small businesses and entrepreneurs. These people will not be present at that meeting, but it is critically important that their voices be heard.
    A systems integrator from Natick, whose company has only two full-time employees, explained the difficulties of determining which services are taxable and the time tracking and billing systems that are now needed to ensure compliance. As a consultant, his day is structured around many different tasks, many taxable and others not. State regulations to clarify which activities are subject to the software services tax are still being formulated – this small business owner is being asked to design and implement an expensive new billing system, before the final regulations are even established.
    A software developer with a small firm in Franklin described other ambiguities. Developers regularly reuse pieces of code when providing services to their clients, even when writing custom software. His business already faces competition for clients and contracts. Collecting this new tax from clients would force him to raise his rates – potentially losing clients in the process – and alter his business model.
    A student studying Computer Science on the South Coast worried that employers in her industry would be less likely to add new employees in Massachusetts due to the added tax burden. Small businesses unable to absorb the added cost of compliance with the new tax may seek to cut back on their labor costs or relocate. Qualified professionals in the fields of Science, Technology, Engineering and Mathematics (STEM) are in high demand nationwide, yet small businesses in Massachusetts may now be unable to afford to add new talent.
    Here in Massachusetts, we are very proud of our technology industry and our reputation as a spectacular place for start-ups, entrepreneurship and innovation. This new sales tax is detrimental to the open, innovative business climate we hope to foster throughout the Commonwealth. Based on the concerns and extensive feedback I received, I filed a bill last month to repeal the software services tax in its entirety. Now, I urge the Governor, Speaker and Senate President to agree when they meet to discuss this issue tomorrow.

  55. Paul, the basic steps to this tax were: (1) The Governor proposed a whole package, including a big income tax increase, a sales tax rate cut and, oddly, a software tax; (2) the House and Senate Ways and Means Committees generated a joint proposal that didn’t pass that package but picked up on the software tax; (3) business leaders were so relieved that the Governor’s package didn’t pass that they said supportive things about the new package; (4) objections to the software tax got lost in the shuffle.

  56. The argument for bonding is that it spreads the cost of the project over the life of the project so that the taxpayers using the project in 2030 help pay for it. That is a powerful argument when you are smaller entity with only a few projects. The state has projects always ongoing so that we could maintain a more or less level pay-as-you-go funding stream. That would save interest costs.

  57. Will,

    That’s not quite what I meant. I understand the workings of the legislature on a basic level (how bills travel through committee, etc).

    What I meant was, how did someone come up with the idea of a software services tax vs. a more broad based tax?

  58. Thanks Will for the explanation: while that bonding arguement makes sense for “fairness”, IMO it would be better for the State or whatever entity, to minimize interest costs, and therefore total costs over the long run, by increasing taxes a little now rather than into the future. Of course, that arguement would reverse if inflation was high but interest rates low (which is not the case now).

  59. it also raises the question of whether tomorrow’s folks should be paying for the choices of the folks today. yes bonding spreads the cost of a project intergenerationally, allowing for many concurrent projects (i disagree with your logic that a steady-state of ongoing capital projects results in level pay-as-you-go funding or savings in interest. would love to hear your explanation on that one).

    but my primary question (perhaps rhetorical at this point) is: is it really “fair” that our grandchildren or great grandchildren have to pay for something we want today? especially when they will likely be paying for it at a much higher cost given these projects always end up being more expensive than originally projected, which in addition to other external factors (e.g. growing pensions and health care costs) impact credit ratings and increase interest rates in the long run? not to mention, will the folks of 2030 get as much value from a project like the Big Dig as the folks of 2013? doubtful. so they are paying more in the future and getting less value out of it. kind of a shoddy deal if you ask me.

    once again, happy to have this discussion offline as I think it’s taking away from the issue at hand, which is this software services tax.

  60. I’ll be interested in hearing the Senator’s specific reply of how this specific tax came about, but the bigger picture problem (IMHO) was that legislators were “scared” of enacting sufficient transportation related taxes like higher gas taxes or vehicle mileage charges to properly fix, maintain, and improve our transportation infrastructure. The simplest way to do this is higher gas taxes, that only now has been increased 3 cents after remaining constant since 1992. Increased fuel taxes can fund our aging infrastructure while providing an economic incentive for people to drive less miles and get more efficient cars. And I’ll respond now to the forseeable criticism that we can’t afford higher gas prices – if we can afford to drive to the local store instead of walking or biking, if we can afford SUVs and minivans for mostly driving a single person to work, then we can afford a few more cents per gallon fuel.

  61. I agree. One thing to consider. All sin taxes become difficult because as you decrease the sin you lose revenue. If you google gas consumption in Massachusetts, you will find that the consumption has declined significantly over the last 5 years or so. This is probably due to increased fuel efficiency and perhaps also to younger generation ( such as my 25 year old daughter ) choosing to be car-less. Regardless, an increase in the gas tax makes the most sense- you will ask find many states with a much higher gas tax than Massachusetts. Not sure what it would take to get 161 million.

  62. The intergenerational funding has built-in obsolescence problems with it. The T is a poster child for it. We have a Boston centric system that is of little or no use for those whose commutes are from suburb to suburb which is the dominant mode. If we gave the planning process back to where the tax dollars came from we would have a lot more nimble system that can provide more options for those in the suburbs. What we have now is funding transportation nostalgia.

  63. Just catching up . . . some summary replies.

    I agree that pay-as-you-go is preferable generally to bond funding especially when interest rates are at normal levels. Just pointing out the other side of the argument — it’s not a slam dunk either way.

    Would support a further gas tax increase — that’s the cleanest alternative to the software tax, which we do need to repeal.

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