The Massachusetts Legislature recently approved a new sales tax on computer services. While the local business community has reacted with shock and vowed to have it repealed, the nonprofit community seems to have reacted with a collective shrug. After all, nonprofits are exempt from the tax, so why should they care?
There are four compelling reasons why nonprofits should be backing business on this issue:
1) It raises the cost for their vendors to do business in the Commonwealth – costs that eventually get translated into more expenses for the nonprofits. At 501Partners, for example, we’ve spent quite a bit of time and money on our CPA to learn what’s actually taxable. Since all of our clients are nonprofits, we now have to collect their IRS authorization letters in case we ever get audited to prove their exemption from the tax. We’ve also had to register with the Department of Revenue to collect taxes and will have to file regular returns – even though we’re not collecting any taxes.
2) Computer professionals can perform their work from anywhere, so taxing their services provides an incentive for them to leave the Commonwealth for more tax-friendly environs. Less tech competition means less innovation and greater pricing power that will challenge nonprofit tech budgets. Only four states tax computer services, so there are plenty of alternatives. (As an aside, the other states are the relative Luddite-tech states of Hawaii, New Mexico and South Dakota, with Massachusetts having the highest rate.)
3) The new tax risks “invisible” job flight which will further erode the tax base – a base many nonprofit budgets rely on. Consider Wakefield-based Analogic, for example. According to CEO James Glenn, they recently purchased an enterprise software costing about $18 million. Had the tax been in place, he says the company would consider moving the installation to a more tax friendly state – along with any associated jobs.
Further, consider how new and expanding tech businesses consider this new tax. They’re quite likely to make the calculation that moving twenty miles to New Hampshire is a smart business decision – further causing hidden erosion of jobs and tax revenues.
4) should consider the long-term consequences of having the Commonwealth tax services. If computer services can be taxed, it’s not a far leap to taxing all services. This would simply compound the deleterious impact outlined above.
In conclusion, new tax revenue is generally seen as beneficial by the nonprofit sector. In this case, however, the balance has been tipped and the sector should wholeheartedly support efforts to overturn this tax.
I would encourage you to contact your Rep and Senators and let them know you back repealing the tech tax.