In one of the last items of Statehouse business Tuesday, top tax legislators decided against extending a tax break for users of cloud computing software for three more years.
In 2010, the state’s Tax Department issued an administrative bulletin levying retroactive sales taxes on businesses that use cloud computing services, requesting that they pay back taxes from 2006 onward.
In response, the software and technology industry rallied successfully for a moratorium on cloud computing taxes, which the Legislature approved through July 2013.
The Shumlin administration has adamantly supported a tax break for cloud computing users, arguing that the tax break creates jobs and encourages the local software industry.
Earlier on Tuesday, Republican Sen. Kevin Mullin, who chairs the Senate Economic Development Committee, made a pitch for extending the tax break to his fellow lawmakers.
“What this exempts is Vermont’s creative economy sector – businesses like Inntopia, Dealer.com, etc,” said Mullin, to the six legislators deciding the question in a conference committee. “The message that we’ve been trying to send … is that Vermont is a place to come if you are a software development company.”
In the end, however, according to Sen. Tim Ashe, D/P-Chittenden, who chairs Senate Finance, the state simply couldn’t afford the $2.3 million tax break this year.
When lawmakers reached a recent agreement on how to cut the state budget by $10 million, budget information already included the assumption that the cloud computing tax revenue would be collected in full this year, he said.
Even after the Senate Finance Committee refined who would be subject to a tax break, narrowing the beneficiaries, their proposal was still slated to cost the state $1.4 million annually in forgone revenue.
Of that $1.4 million, $900,000 would have come from the General Fund, since a portion of any sales tax goes to the Education Fund.
“They wouldn’t have been cutting $10 million. They would have had to cut $10.9 million in spending, in order to accommodate our proposal,” Ashe said. “They couldn’t get there. It was a struggle for them to get to $10 million.
“We couldn’t pass something that cost more money, that threw off the entire budget,” he said. The full Senate has previously backed a cloud computing moratorium.
As late as Tuesday noon, however, administration finance chief Jim Reardon maintained the administration could “cobble together” $900,000 in cuts. Ashe said that claim didn’t reassure him, and added that it would amount to imposing unknown cuts at the last minute in the budget process.
Given a bit more time, notice, and certainty from the legislative body, said Reardon, “we’d have found a way to make it work.”
“If cloud computing would have been accepted, then we would have found a way to make it work,” Reardon said.
But the fact that the Shumlin administration could find $900,000 in cuts or revenue to support a cloud computing tax break, but couldn’t find similar revenues to support other important spending priorities, like subsidies for low-income Vermonters entering the health exchange next year, irked House lawmakers like Rep. Janet Ancel, D-Calais.
Ancel, who chairs House Ways and Means, has opposed a cloud computing tax break, since voting against it on a study committee last year. The full House voted against extending a cloud computing tax break.
“We heard testimony from the commissioner (Reardon) about cobbling together the $900,000. And I think, like most people, I just have other ways I’d like to spend that money. What about premium assistance for people who are going into the (health care) exchange?” asked Ancel.
“If we’ve got $900,000 out there to be cobbled together, to me that’d be a really terrific use for it,” she continued. “To just be told that we can come up with close to a million dollars, through some sort of whatever, concerns me.”
“There were other people in line for resources in the budget,” Ashe said earlier. “People who have the dumb luck to have cancer, and now are going to pay higher out-of-pocket expenses. And it appears that we’re saying money can be cobbled together in one instance, and not in the other.”
Reardon countered that he’d not been tasked with finding an extra $900,000 for health care subsidies.
State Tax Commissioner Mary Peterson later also cautioned lawmakers that the full $2.3 million of post-moratorium tax revenue might not be easily collected.
“I think what everybody has to remember is how we got here,” Peterson told lawmakers Tuesday afternoon. “People were disputing the application of our statute. And companies are disputing that across the country, it hasn’t been settled in any state.”
She said the tax is tough to administer and adjudicate, and raised questions about how much revenue the state could raise without facing some litigation.
Economic development Secretary Lawrence Miller, who heads the Agency of Commerce and Economic Development, said after the decision that it wasn’t clear that ending the tax break destroyed jobs, but added that businesses still sought clarity on who would be taxed and why.
That’s a likely topic for coming years, said Ashe, who characterized the tax as very complicated and hard to explain.
“We will be forced to make difficult decisions around this as the technology evolves,” said Ashe. “Every state is challenged with this right now.”
More than 20 other states collect a cloud tax in some form, said Ashe, with each state administering it in subtly different ways.