Massachusetts Channel Partners Struggling With Services Tax Proposal

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Those questions also ring true for Allen Falcon, CEO of Cumulus Global, a Westborough, Mass.-based cloud services company focused on the SMB segment.

"It's unclear exactly what's subject to tax and what isn't," he said. We know that Web hosting services would be taxed. But, the problem stems from a variety of different specifics. For example, if I am an out-of-state company that has web hosting in a data center in Massachusetts, do I need to collect sales tax on that, even if I'm located out of state? If I have to increase my costs by 4.5 percent, I become uncompetitive with resellers in 49 other states. Most margins on cloud services fall between 15 and 30 percent. The majority seem to land somewhere around 20 percent. So if I need to absorb the tax to be price competitive, then I've just cut my gross margin by 25 percent. And at that point, it really becomes a question of whether I can make money."

Falcon also noted that such a tax could impact the Commonwealth's position in attracting innovative technology companies.

"Massachusetts has been very aggressive in attracting startups and innovative companies," he said. "Certainly, we want to hold onto the talent that we develop at MIT and at other institutions. But this proposed tax would set up a situation that encourages them to drive an hour north into New Hampshire, and hours south into Rhode Island, and over to New York to retain greater profitability. I also think it will chill venture capital."

In the software design and development sector, the language of the proposal is far too vague, according to Jon Follett, principal of Involution Studios in Arlington, Mass. [Disclosure: Follett is the spouse of Jennifer Hagendorf Follett, executive editor, online, at CRN.]

"A red flag goes up for me every time there is broad language that can be interpreted a couple of different ways," he said. "And I guess you could say that the jury is out in terms of which services would actually be impacted by it. I'm all for paying a fair share of taxes, but this needs a lot more clarification. And it really begs the questions around the definition of customization, what is covered by this tax, and who is interpreting the legislation. There are a lot of open questions here."

Other Massachusetts businesspeople expressed concern over the logistics of collecting the tax.

"I don't know how it's going to affect buying patterns, but my biggest concern is how we are supposed to execute on it," said Timothy Shea, CEO of Alpha NetSolutions, a Millbury, Mass.-based channel partner. "I operate in five states, so I'm already tracking different tax rates in different states." Shea went on to cite other issues, such as the ambiguity surrounding what is taxed and what is not, the additional administrative work the tax may create and the disconnect between legislation and the "real world."


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