The IT Sales Tax

Engaging Public Policy

No IT Sales Tax copyIn addition to starting, running, developing, growing, and sustaining a small business, you have a role or two in your communities. In your business community—you, your colleagues, business partners, those with whom you collaborate, those from whom you purchase and to whom you sell—you get to participate in establishing values, principles and behaviors simply by how you do your work and engage others. In your civic communities, including the networks of friends and associates with whom you exchange ideas as well as social interests, you can also be involved in some level of public policy.


“Oh, man, now what is this guy talking about? I’ve got no time for this policy-wonk stuff.” True enough: the world in which we create formal community rules, behaviors, laws, and guidelines is something we tend to read about and then leave to elected and hired officials. 

Enter the “Tech Tax”

Then along comes something like the “Tech Tax”. This is Public Policy writ large: a piece of legislation that has potentially very large and possibly harmful impacts, passed with the good intention of raising much-needed funds for transportation (roads, bridges, rails). And it has immediate impacts on most of us at some level: it’s a tax on the non-tangible aspects of information technology.

The “Tech Tax” essentially extends the current sales and use tax laws to now cover “computer system design services” and “software modification services”, and covers design, consulting, and systems planning. This sales and use tax extension requires all of us who engage in these lines of work or purchase these services (web-site design included? Not clear!) to pay or collect an additional 6.25%.

Up until this point, the Massachusetts General Laws regarding sales and use taxation specified that these taxes were largely for “tangible personal property.” And professional services have been explicitly excluded: On the Department of Revenue’s web site, this appears: “accounting, insurance, legal, and medical services, as well as services such as haircuts and car repairs, are not taxable.” But information technology system services are now taxable. Apparently the IT lobby is not yet as significant as the hair-grooming lobby.

How Tax Policy Works

Tax policy is, as everyone knows, extraordinarily complex, convoluted, contradictory, confusing, and highly charged: someone always feels targeted and hurt while someone else experiences some benefit or gain. Taxation is rarely paired with “fair” or “simple” or “happy.” Yet the costs of public services and benefits have to get covered somehow, and straight-up fees would tend to become so prohibitively expensive that very few could ever afford to purchase the service or benefit. For example, if roads, bridges and public transportation systems were entirely financed through fees, the billions of dollars needed to build and maintain a basic network would require very high tolls and ticket prices. Only the very wealthy would be able to actually use the network, and that would in turn defeat the public value: people wouldn’t be able to travel to jobs, let alone to families, friends, or distant towns. And the prices of all goods and raw materials delivered by trucks and trains would have to escalate so that transporters could afford the fees. Everyone would suffer as a result.

A collaborative approach is to distribute the cost of some public goods and services very broadly, which in turn—theoretically, at least—lowers each individual’s cost. One way to do this is through tax policies.

Currently, our local, state and national debates focus on tax policies—to the point of paralyzing Congress. At the root, however, is a more profound concern over cost, which in turn is a proxy for the most profound question: what should government be doing for people? The more government does, the more costs; the more costs, the more taxes and fees.

The Tech Tax policy can be thought of as a confusing approach to raising money for transportation systems. However, the concerns over this tax illuminate many, inter-related concerns. Even if we focus our concerns on taxation, we are still forced to wonder about:

• Why this particular sector of professional services, when other professional services remain untouched? • What particular services will be included: web design? Fixing a software glitch? Planning a network configuration? Updating virus and other male-ware definitions? • Why pass tax legislation without having figured out the basis of the tax regulations – who pays, for what reason, etc.? • What will the “unintended consequences” be — especially for the small business? Will the added tax impose a cost that drives customers away, which in turn will drive entrepreneurs, consultants, and designers away? • How much is this expected to raise in revenue? • Is the best way to raise the needed revenue?

(and of course there are the non-tax questions of: how much revenue is really needed? For what purpose? Who gets to decide if the money is going to the best possible transportation uses?)

Embedded in these questions are many sets of social and political issues and agendas. Yet as an entrepreneur, you will have to take into account the tax, its impacts on your sales and on your customers, your decisions about business location and growth, and your social and political values.

Yes, We Have to Pay Attention to this Stuff!

We really do want to pay attention to this issue. And we want to somehow have the room in our business and enterprise lives to think about and at least sometimes get involved in public policy.

In this case, I think we need to get rid of the Tech Tax. It’s not clearly formulated, it incorrectly focuses on a particular set of service sectors which are at the core of the State’s economy, and it was created and passed “on the sly” within a larger piece of transportation legislation. It will be costly without clear value; I think I can predict that the cost of implementing and managing this tax policy, especially in the way it’s currently written, will cost the State millions of dollars in administration alone.

If you agree with me, I encourage you to participate in the effort to repeal this law by writing and calling your State representatives and senators. If you don’t agree with me, do the same thing: be engaged on this issue. Getting many mindful entrepreneurs involved in public policy will, I believe, have broad social benefits!

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