Will New Sales Taxes on Computer Services Boost Massachusetts Transportation Financing?

After months of debate, a veto, and an override, Massachusetts now has a blueprint for financing one of the largest overhauls of the state’s transportation infrastructure in decades.  The controversy over Chapter 46 wasn’t whether additional transportation financing was necessary – all sides agreed that it was.  The sticking point was instead a) how much, and b) from whom.

As our colleagues Nicola Lemay, Earl Mellott, and Sharon Lincoln have pointed out, one of the new sources for transportation funds is an unlikely one: the expansion of the state sales tax to cover computer system design and software modification services.  Up until now, hiring someone to plan or design a computer system — or hiring someone to install or configure a software program — was tax-free.  No longer.  Starting on July 31, those services, with only a few exceptions, will be subject to the 6.25% sales tax, with the proceeds going to fund state transportation improvements.

Yet while the legislative battle may be over, the challenges of implementation are just beginning. Here are two key challenges to watch.  First, new tax revenues obviously can’t be spent unless they have been collected, and as our colleagues observe, the scope of the new tax is “vague and may be difficult to interpret in practice.”  The harder it is to figure out who owes the tax and who doesn’t, the greater the potential for uneven compliance and enforcement — meaning that the tax may generate less money for the transportation coffers than the Legislature expected.  Second, there are already rumblings that the new tax should be repealed.  Both taxation watchdogs and technology industry advocates have voiced their opposition, as has a recent Boston Globe editorial.

In short, while the Legislature has now charted the course for transportation funding reform, the complexity of the new sales tax on computer services illustrates that there’s no guarantee it will be smooth sailing from here on out.

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