Massachusetts officials are rethinking a new sales tax on software and technology services that went into effect earlier this year.

On Sept. 4, Gov. Deval Patrick met with industry and legislative leaders to discuss concerns that the tax — which was born from a broader bill to fund transportation projects — could be harmful to the Massachusetts economy and to resolve confusion about the scope of the law.

In his most recent press conference, on Aug. 28, Patrick told reporters that he was “concerned, but not alarmed” about the new law. But Patrick also said the new law will likely create negative outcomes not intended by the Massachusetts Legislature.

“I’ll leave aside the fact that I vetoed the bill, but it’s also clear that we need funding for transportation,” Patrick said. “And if there is to be a fix, then we need to have the whole conversation, which is what do we need to replace it with? So those are some of the questions, try to get a sense of exactly what people are worried about.”

After the bill became law on July 31, two industry-backed groups, the Massachusetts Taxpayers Foundation and the Massachusetts High Technology Council, started fighting the law. The groups first created an initiative urging legislators to repeal the tax, and now have added a line to next year’s state ballot that would give voters a chance to repeal it.

Massachusetts estimated the tax would generate $161 million in the current fiscal year, but other groups, such as the Massachusetts Taxpayers Foundation, projected the tax would cost businesses closer to $500 million.

Christopher Anderson, president of the Massachusetts High Technology Council, believes the tax will harm the state’s economy, likening it to the state of Florida taxing its citrus industry. He added that because other states competing with Massachusetts technology companies don’t have this kind of tax, it puts Massachusetts at a competitive disadvantage.

“The commonwealth has more technology clusters than any other state in the United States,” Anderson said. “We have one of the largest percentages of total workforce working in high tech and we have more residents with advanced degrees than any other state in the country.”

Early Confusion

There is confusion in Massachusetts as to which services and products the tax would apply to and in what instances. Supporters of the law have assured the industry that open-source software would remain unaffected, but the state’s 6.25 percent tax rate would still apply to certain other software and services, a rate higher than the three other states that have such a tax. The other states with similar taxes are New Mexico, South Dakota and Hawaii.

Anderson felt that because there was no public hearing on the bill, there was no opportunity for those who are being affected by it to provide testimony and evidence as to how big of an impact the tax was going to have. He added that many legislators are backtracking on the law, indicating that it might be repealed before voters have a chance to vote on the issue next year.

“I believe every candidate in the special congressional election … agreed the tax ought to be repealed and a growing number of rank-and-file Democrats in the House and Senate feel similar,” Anderson said.

Colin Wood  |  Staff Writer

Colin has been writing for Government Technology since 2010. He lives in Seattle with his wife and their dog. He can be reached at cwood@govtech.com