Under a provision in Governor Deval Patrick’s fiscal 2014 plan for the state, a "modern products" Massachusetts sales tax of 4.5% will be levied on the design and engineering services that create the digital world. Massachusetts is filled with software development companies — with verticals from mobile to healthcare to enterprise. It's a key innovation sector that drives the growth of our state economy and keeps our employment — which has consistently been better than that of the nation as a whole — at a healthy rate.
So, what will the consequences of this new tax be? For every $1 million in revenue, under the Governor's proposal, a software shop will pay an additional $45,000 — on top of the payroll, property, real estate, business and any other taxes it already pays. Consider this: For every $2 million in revenue, that's $90,000 in taxes, which could cover the salary of an entry-level software engineer including benefits. The 2011 Index of the Massachusetts Innovation Economy, indicates that software and computer services accounted for $31 billion of Massachusetts economic output. If, for the sake of argument, we consider just half of the economic output as taxable software design and development services, that would result in about $695 million in tax revenue, or roughly the equivalent of 7,750 entry-level software engineering jobs. Will this new proposed tax eliminate the creation of 7,750 high-quality jobs in Massachusetts? I'm not eager to find out. Now, to be fair, the Governor's budget estimates show a figure of just a quarter billion dollars in revenue to be realized from this tax, but the true consequences, like the law itself, remain unclear. The law is vague enough that the sales tax could cover all kinds of software, from mobile apps to even Web sites.