Jon Margolis is VTDigger’s political columnist.
[V]ermont’s high-tech business leaders don’t want to lose their government subsidies.
Who would?
To keep them, some top executives of companies whose names end in “dot com” are using the same tactic long employed by farmers, nuclear power firms, airlines, and other beneficiaries of government largesse: whining.
“It would change the way I have to price my product,” one of them told the Senate Finance Committee (via telephone).
Things are tough all over.
Don’t tax products sold via “the cloud” (software and services that run on the internet, not on your computer), dot-com executives urged the committee Wednesday. They said it’s too complicated and confusing.
Eighteen other states don’t find it too complicated and confusing. Neither does Tax Commissioner Kaj Sampson, who does not favor taxing cloud-based commerce. Neither does his boss, Gov. Phil Scott. But not, Sampson said, because administering the tax would be “overly challenging.”
It wouldn’t be overly challenging. It would just do away with an advantage the dot-com companies want to keep. A government subsidy.
These subsidies are not payments from the government. They are tax exemptions. The companies sell products which are not subject to sales taxes, even though many of the products are identical to what people buy in stores, paying sales tax.
The company that doesn’t have to collect the tax can charge less, meaning it can sell more and earn more. No wonder they don’t want to have to collect that tax. Nobody wants to give up a cushy deal.
Especially when, as in this case, the cushy deal is in danger because the state needs money to fix a problem the high-tech industry did not create. Software did not pollute Vermont’s lakes and rivers. Perhaps ironically, if any one industry is most responsible for that pollution, it is the dairy farm industry, which is far more government-subsidized than the dot-coms.
But those are federal subsidies, beyond the reach of the state Legislature, which has to come up with roughly $8 million this year to start cleaning up the water.
Or more accurately, to stop making it dirtier quite as fast as it’s getting dirtier now. For years, everybody has agreed that the state needs to raise this money. Nobody has agreed on how.
At the beginning of the year, Scott suggested using money from the inheritance tax. The Legislature said no. Last month, the Senate passed a clean water bill (S.96) which outlined how to spend the money, but not how to raise it. Senators said the House of Representatives should come up with a fundraising plan.
So it did. Last week, with an overwhelming, bipartisan majority, the House passed the bill with a funding plan devised by its Ways and Means Committee. The idea was to tax goods sold via the cloud.
Like most states, Vermont raises much of its revenue with a sales tax. Some goods (most groceries, medicines) are exempt from the tax. But there is no logical reason for exempting products otherwise taxed if they are sold through a different system. That exemption is a government subsidy.
For instance, a consumer who buys a tax preparation program pays the sales tax if he buys it at a computer store or orders it from the company online. But under existing law, that same consumer pays no tax if he buys the same product via the cloud.
The product is the same. The transaction is the same. The law is different, having determined that a product bought via the cloud is not “tangible personal property.”
The House decided to remove that legal fiction.
The high-tech crowd was not alone it its opposition. Senate President Pro Tem Tim Ashe wrote to the head of the Vermont Tech Alliance, the lobbying group for the high-tech industry, that he “does not support applying this tax and will try to convince my colleagues to maintain the Senate’s historical position.”
In an interview Wednesday, Ashe walked back the “try to convince my colleagues” part. “I’m not on the committee,” he said. And he is committed to finding a funding source for the water cleanup. If the Finance Committee chooses to go the cloud tax route, Ashe said, he would not oppose it.
The committee took no vote Wednesday. Chair Ann Cummings, D-Washington, said she was undecided on the cloud tax. But neither she nor the other members seemed very convinced by the complaints of the dot-com execs that the tax would be difficult to administer and could threaten their prosperity.
Cummings and the others kept coming back to the fact that many other states tax products bought over the cloud. So the companies must have created the systems and bought the software to collect the tax. Unless they have no customers in Florida, Pennsylvania, Washington, and other states which apply the sales tax.
Or unless they’re evading the tax.
It’s true that Vermont adopted but abandoned a cloud tax several years ago because there were technical and logistical problems in implementing it. But Graham Campbell, the Joint Fiscal Office analyst who explained the proposal to the committee (and who takes no position pro or con) pointed out that this was before last year’s U.S. Supreme Court decision (South Dakota v. Wayfair) which ruled that states can require businesses to collect and remit sales taxes even if those businesses have no physical presence in the state.
Now that other states are taxing cloud sales, Campbell said, they have adopted rules and procedures for managing the collections.
When one of the dot-com execs finished his presentation, Sen. Mark MacDonald, D-Orange, noted that Vermont has often provided tax preferences to new industries while they get established.
“When are you going to get on your feet” and be able to thrive without the preference, he asked Robbie Adler of Faraday Software.
“I don’t feel that there’s some sort of loophole here,” Adler said.
“I asked when you’d be ready, and you answered my question,” MacDonald said.
Asked later whether he interpreted the answer as “never,” MacDonald smiled.
But just because Finance Committee members did not seem persuaded by the arguments of the dot comers, that doesn’t mean the committee is likely to adopt the cloud tax.
It is not. Ashe still opposes it, and he is the most powerful senator. So the committee is more likely to choose another funding source. It turns out that there are several.
Besides, as has often been the case throughout American history, whining works.
