This Is What State Leadership Looks Like?

I’ve been trying to figure out if we have any state leadership here in RI. When we have a Governor who gets embroiled in what to call an evergreen adorned in lights in December and a General Assembly who is more concerned about what appetizer they want to endorse, I’m trying to figure out if they have any ability to lead. Apparently, some states have it figured out.

I recently read a press release from Ken Block about a new 6.25% tax that Massachusetts (as of August 1) just created on custom-built software and its implementation. This is not a tax that RI currently has. Very similar to the argument for the “Zero Point Zero” sales tax in RI, that it will attract businesses to RI, this is the same concept. Mass has a great many software firms. Does it make sense for them to take a look at Rhode Island if they’re going to save that extra 6.25% on their costs? Does that at least make sense for them to look into? Of course it does.

What’s also interesting with this topic is that two states have seen this as an opportunity. First, Florida governor Rick Scott put out his own press release:

On Aug. 6, Scott sent letters to 100 Massachusetts business owners, inviting them to relocate to the Sunshine State “because we have the perfect climate for your business.” He trumpeted his state’s “incredible economic turnaround,” and drew a few pointed contrasts: “While Florida’s unemployment rate has seen the second-largest drop in the country, Massachusetts’ June unemployment rate increased to the highest since November 2011,” Scott wrote. “While Florida ranks fifth in the nation for our business tax climate, Massachusetts is stuck at No. 22, according to the Tax Foundation.” And now that taxes are up again — Beacon Hill raised taxes on gasoline and cigarettes, and enacted a 6.25 percent sales tax on software and computer services that has the tech sector in an uproar — “it’s bound to get worse in Massachusetts.”

Very aggressive and well-played. However, another state has jumped into the fray as well.

New Hampshire’s Business and Industry Association says the tax may inadvertently capture New Hampshire businesses with a presence in Massachusetts.

Businesses with a physical presence in Massachusetts providing services covered by the tax to Massachusetts customers may be subject to what’s become known as the ‘‘tech tax.’’

‘‘We want to make sure New Hampshire businesses are aware of this new tax and acknowledge that it could possibly impact where they choose to do business and from whom they choose to purchase goods and services,’’

It’s played off as a “hey, we’re just making you aware” but it can also be very clearly read as “if you got an office in Mass, shut it down and come on back to New Hampshire.

You would think that leaders in the state with the third highest unemployment rate in the country would be looking at any and every possible opportunity to get new businesses and jobs into Rhode Island. At a minimum, a simple public pronouncement from the Governor would be great. How about an advertising campaign on Mass television and radio stations proclaiming Rhode Island as a viable alternative to this new 6.25% tax? Has anything been done? Do we currently have any leader in this state who is capable of sensing this opportunity and jumping on it? How often does a situation like this arise where Rhode Island can benefit without needing to change a single thing? We have this area where RI actually has a financial advantage over its neighbors. Didn’t Speaker Fox and the rest of the General Assembly just overhaul the EDC and create a new Commerce Corp? Wouldn’t something like this be right up their alley?

ADDENDUM: Apparently there is some confusion with regard to my statement about whether the tax includes “custom built” software. Some say it does not. However, some aren’t so sure. Here are some more sources which show the confusion with the law:
Boston Globe: “The amendment offered by the Taxpayers Foundation would not apply the sales tax to custom software or enhancements to standard software programs used by businesses.”

Fast Company: “but if you “customize” or configure the software in any way, it’s taxable”

The State of Massachusetts’ FAQ due to confusion on the law: ”

4. In the Department’s Computer Industry Regulation 830 CMR 64H.1.3 (6) there is an exemption for sales of custom
software and a discussion of custom modifications to prewritten software. How is this exemption to be reconciled
with the new law in which “the modification, integration, enhancement, installation or configuration of standardized
software” are taxable?
A. The regulation to which you refer has been superseded (and thus made obsolete) in some respects by the new
legislation. To the extent that the regulation is inconsistent with any of the new statutory provisions or TIR 13-10, it has
been superseded by the change in law. The Department intends to amend the regulation so that it will reflect the new
statutory rules that are now effective.”

Others who are deeply involved seem to have the same questions and confusion on what customized software is taxed.

 



9 Responses to “This Is What State Leadership Looks Like?”

  1. Anthony
    August 20, 2013 at 11:54 pm #

    Simple explanation. They do NOT have any interest nor do they know how to accomplish the task. The State's "leaders" are too busy trying to figure out how to increase "revenues and fees" of it's own.

  2. Mike678
    August 21, 2013 at 7:13 am #

    I have met many of the GA members. Frankly, not the sharpest tools in the shed. Additionally, their dearth of reasoning ability–combined with their ideology–blinds them to any answer but more of the same. Until RI moves these well meaning but incapable people to the curb…..

  3. Dan
    August 21, 2013 at 10:21 am #

    RI shouldn't be inviting businesses to look under the hood when it comes to tax rates. The fliers can go out when RI legitimately has something to crow about.

    I see RI union activists are protesting another downtown business today for taking advantage of a tax break. That's sure to help RI's business-friendly image.

  4. Mike
    August 21, 2013 at 12:27 pm #

    The leadership in RI won't capitalize on this opportunity because it does not know there is an opportunity to capitalize. It would be interesting to have a poll on Smith Hill. Ask each member of the GA to see if they even know MA passed a tax on software. Anyone care to guess the percentage of those in the GA who don't know this tax was passed?

  5. mangeek
    August 21, 2013 at 12:32 pm #

    There's more to things than the Tax Rate, and there's a reason why the software industry 'clusters' in areas, even if they have high tax rates.

    First off, software and technology people are, on the whole, VERY mobile and non-unionized. They move around a LOT. There's value to being in an 'ecosystem' like Boston or San Francisco. Try to move a bunch of developers to somewhere that's 'not hip' or where they can't find another job, you'll have to pay them a HEFTY premium. Many of the companies rely on talent and elbow-grease from low-paid interns or fresh graduates, so they tend to cluster near 'research spending', which correlates with public expenditure, which correlates with higher taxes.

    Also, the software development sector has VERY high margins, enough to absorb 6% off the top. The 6% isn't enough of a difference to override the other factors. Industries that have low margins are more likely to chase tax benefits (energy, agriculture, manufacturing). High-margin sectors (finance, technology, health care) cluster near each other and near their 'incubators', which come at a price.

    I just spoke to a technology business owner in Massachusetts. I asked 'why not move to Rhode Island?', he laughed and told me that he wouldn't be able to hire anyone qualified or send his kids to public school, plus he'd have to deal with potholes and aloof public service providers; 6% is a drag, but not enough to trade that stuff for.

  6. Patrick
    August 21, 2013 at 1:28 pm #

    Mangeek, much of what you say may be true, but the real point is where is the leadership to even make the point that RI doesn't have this tax? Both FL and NH stepped up with public statements, even if they were shallow or meaningless (I don't think they were). Like commenter Mike above you stated, the real problem is the lack of awareness and the inability to see the forest for the trees. It's that lack of vision and leadership as to why RI keeps plodding along.

  7. Dan
    August 21, 2013 at 1:47 pm #

    Mangeek – Spot on. Rhode Island's bad reputation for corruption, poor services, regulatory burden, instability, and whacko organized labor preceeds it. Any business worth having isn't going to be fooled by a marketing gimmick based on one tax rate. RI needs to make a credible effort to reform its political and economic climate, starting with good government protections. Since there's no chance of that happening, it makes sense for talented young people to hire a moving van instead and set up shop in 1 of the other 49 states that has its act together.

  8. mangeek
    August 21, 2013 at 1:50 pm #

    That would be the EDC's job. If we want to court that kind of business, the EDC should be preparing brochures loaded with statistics and case studies that show the advantages of relocating to Rhode Island, then targeting companies that would be likely to jump.

  9. Pamela
    August 22, 2013 at 2:37 am #

    Actually this new tax regulation impacts any business in Massachusetts that engages another company to, under certain circumstances, install software, customize software and whatever else is covered by the new law.

    As for the software development/consulting firm that is providing goods or services subject to the tax, the only direct impact to margin would be whatever in-house or ouside expertise is needed to navigate a very confusing tax regulation so that it can properly collect, account for and remit the sales tax. Since it is a sales/use tax, it is paid by the end customer to the firm as a sales tax or paid directly to the state as a use tax. Now, if the firm decides to reduce their pricing to absorb the cost of the tax to maintain business that does have a direct margin impact.

    Indirectly it may force some customers to re-evaluate their need for the now taxable goods or services, which could result in lost business for the software development/consulting firm. or it may force changes in the firm's business model. I know that it has changed my firm's plans. We believe that this introduces unacceptable administrative and customer satisfaction risk due to their being far too much regulatory gray area.

    Standard disclaimers of I'm not a lawyer, I'm not an accountant, your mileage will vary, don't try this at home, etc. apply.

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