Research & Commentary: Technological Services Taxes

Published November 13, 2013

A recent report from the Bay Area Council Economic Institute found the high-tech sector has grown three times more rapidly than the private sector as a whole since 2004. According to the European Information Technology Observatory (EITO), the high-tech industry has been one of the main forces driving international economic growth. International spending for IT and telecommunications is expected to increase by 5.1 percent in 2013, reaching as high as 2.7 trillion Euros. The growth rate of the U.S. high-tech sector is expected to be 6.5 percent in 2013.

Several states are proposing new taxes on technological services such as software upgrades, network design, and cloud computing. These taxes would impede further growth in the industry.

The appeal of such a tax is obvious: Millions of dollars in new tax revenue could help balance the budgets of states that have yet to recover from the economic downturn. Such a tax, however, places a burden on tech services that is not applied to other products or services. Sales taxes work best when they are applied at a low rate and to a wide base; placing a discriminatory tax on a single industry, as the tech service tax does, serves only to reduce the size of an industry while increasing the cost consumers pay for these services.

Taxes on these services can affect nearly every industry, since virtually all businesses utilize outside companies for software and cloud-computing services to meet their individual needs. The tax will increase the cost of expansion, development, and modernization for nearly all industries, ranging from high-tech biotechnology companies to job-creating manufacturing and retail firms.

According to the nonpartisan Tax Foundation, only 10 states currently tax all writing or updating of software, and three impose their regular sales taxes on all software services. Recent efforts to implement these taxes have brought on a massive pushback from industry leaders, and two high-profile tech service taxes—in Maryland and Massachusetts—were rolled back only a year after implementation. Michigan is likewise considering rolling back its tax on cloud computing after several high-tech firms threatened to leave the state.

Technology companies are strongly attracted to states with a well-educated population from which they can draw talented programmers and developers and a tax system that allows them to make a profit and grow their businesses. Imposing taxes on technological services restricts the potential of one of the few remaining growth industries and drives companies and talent to more tax-friendly states. Lawmakers should implement tax policies that encourage new businesses to enter the state, not drive them away.

The following documents provide more information on taxes and telecom policy.

Ten Principles of Telecom Policy
In this Heartland Institute Legislative Principles booklet, Hance Haney and George Gilder examine the results of telecom reform in Indiana, the advances made by other innovation leaders in the telecom market, and how other states can follow their lead to reap the rewards of new investment in telecommunications services. 

Eight Principles of Telecommunications Policy
The Washington Policy Center lays out a framework describing how legislators and citizens can apply to debates over technology and telecommunications policy many of the basic free-market principles used in discussions of budgets and taxes, education, health care, and the environment. 

New Computer and Software Services Tax Most Burdensome in the Nation
This comprehensive 50-state analysis from the Massachusetts Taxpayers Foundation shows the state’s recently enacted software services tax is the most burdensome in the nation. The Excel file allows users to compare Massachusetts to 49 other states on the tax treatment of 11 different categories of computer and software services. 

Research & Commentary: Taxing Cloud Computing
Cloud computing has fundamentally changed how consumers purchase and use software and computing services by moving many of the functions online. Matthew Glans of The Heartland Institute documents information suggesting state legislators should avoid placing new, burdensome taxes on cloud computing and abide by the physical presence standard. Otherwise, providers will be discouraged from setting up shop in-state or supplying these services there. 

Policy Tip Sheet: Myth Vs. Fact—Internet Taxes
Heartland Institute Government Relations Director John Nothdurft examines several myths and facts about Internet taxes. 

Stiff Resistance to State Technology Taxes
Writing in Stateline, Elaine Povich documents efforts by states to create or raise taxes on technological services such as software upgrades and cloud computing. Povich reports on these efforts and the backlash from the high-tech industry, and she notes several state efforts to create tech taxes have failed. 

Momentum Builds to Repeal Maryland Computer Services Tax
Joseph Henchman of the nonpartisan Tax Foundation examines Maryland’s proposed tech tax and speaks with critics of the tax about its effects and why they support repeal.

New Massachusetts Software Services Tax Highest in Nation
Sarah Kuranda compares the new software and network design taxes in Massachusetts with similar taxes in other states.

Nuts-and-Bolts Answers on Cloud Computing
Writing for TaxAnalysts, Timothy Noonan examines several states’ treatment of cloud computing questions, noting the problems they’re having in defining how to treat cloud computing technologies.

Custom Software and Network Design Services Tax Q & A
The Massachusetts High Technology Council explains how the custom software and network design services tax emerged and why it is a bad idea for Massachusetts.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Tech News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].