Pennsylvania tech sector rallies against proposed tax

In an attempt to help close a $3 billion deficit in the state’s 2017-18 budget, Gov. Tom Wolf has proposed a computer services tax on Pennsylvania’s technology sector.

The proposal, informally known as the Pennsylvania “tech tax,” would eliminate sales and use tax exemptions for computer services, along with those for other industries such as commercial storage and aircraft sales.

Software consulting is analogous to development, said Brian Kennedy, spokesman for the Pittsburgh Technology Council, an advocacy group in Oakland.

In this category of computer services, companies or individuals write software for day-to-day operations or for resale as a standalone product. The proposal would levy a 6 percent state tax. In Allegheny County, which imposes a 1 percent local sales tax, that rate would reach 7 percent.

“There are only three states that tax computer services this broadly to include software along with hardware consulting,” Mr. Kennedy said. “But none of them come close to the rate at which Pennsylvania will tax these services.”

In total, the sales tax expansion includes data processing, hosting and related services; custom computer programming services; computer system design services; computer facilities management services; and related services.

According to the governor’s spokesman, J.J. Abbott, Mr. Wolf has proposed tackling two-thirds of the deficit through spending cuts and “other savings.”

“The remainder of his package to address the deficit is focused on tax changes that close corporate loopholes and enacting a long-overdue severance tax on gas drilling,” Mr. Abbott said.

Mr. Kennedy disagrees with that description. “To call it a loophole is not an accurate representation,” he said.

Currently, 15 states either fully or partially tax computer services, according to the Multistate Corporate Tax Guide. Of those, four states impose taxes on software consulting services, one of the greatest revenue drivers in computer taxation.

Connecticut taxes computer services at 1 percent, Hawaii and South Dakota at 4 percent, and New Mexico at 5 percent, according to a 2013 study by the Massachusetts Taxpayers Foundation.

The independent research organization created a 50-state database to compare tech taxes after Massachusetts’ 2014 budget proposal introduced what would have been the most burdensome tech tax in the country, Mr. Kennedy said.

In Mr. Wolf’s proposal, the administration notes that “any proposed tax changes will focus on

ending special tax treatment for favored interests” and that the 2017-18 year will procure $359.9 million in taxes from computer services, which differs from the $330 million figure cited by the Pittsburgh Technology Council.

Mr. Kennedy said the group used the lower estimate because budget secretary Randy Albright listed it in his Feb. 7 presentation on the state budget.

Comparatively, the Independent Fiscal Office, which provides nonpartisan analysis on revenue assessments by the state, projected the computer service taxes would yield $349 million in revenue.

The proposed budget and its provisions, including the tech tax, must be negotiated and passed before the new fiscal year begins July 1.

Mr. Kennedy believes that the tax, if passed, would result in a direct loss of employees managing IT projects as well as a loss of local vendors, including software developing teams, which will see work go to companies in other states with a smaller tax burden.

On May 3, state Rep. Mike Turzai, R-Marshall, issued a statement in opposition to the tax.

“Pennsylvania has seen tremendous growth in the technology sector over the past two decades,” he said. “These are good, family sustaining jobs that could easily be moved out of state.”

According to the Pittsburgh Technology Council’s 2016 State of the Industry Report, technology companies and those in related fields employed 302,535 individuals in southwestern Pennsylvania — up to 24 percent of the area’s workforce.

Paul J. Mathison — founder of Philadelphiabased research firm pjmathison, which helps consulting firms navigate issues in government — said “big box” consultancies would be affected.

“It would be disruptive and costly to the Pennsylvania economy and jobs,” he said. “They would easily relocate across the border over time.”

Mr. Mathison noted that his firm is not representing any consulting companies in this area of debate.

Through Pittsburgh Technology Council’s efforts in opposition to the proposed tax, at least 1,500 companies sent letters to legislators, Mr. Kennedy said.