Vermont Tech Leaders Say 'Cloud Tax' Could Darken Prospects For Industry Growth
House lawmakers have finally landed on a proposal to fund water quality efforts in Vermont, but leaders in the state's technology industry say the plan could put a damper on a growing sector of the Vermont economy.
Five years ago, Gary Margolis started a company called Social Sentinel.
"We provide our software to schools across the country — in more than 36 states — that allows them to scan … open-source and public information," Margolis said Wednesday.
Margolis' Burlington-based company was borne out of growing concerns over school shootings in the United States. Its software allows schools to flag potential threats, by identifying students or other people who are threatening violence on social media platforms.
Social Sentinel is what's known in the industry as a "SaaS" company — short for "software as a service." And while Margolis' products are currently exempt from Vermont's 6% sales tax, a clean water funding plan approved by the House Ways and Means Committee would change that.
"If the future economy in this country is based in part on the idea of technology, then why wouldn't Vermont want to do things that make it attractive to be here?" Margolis said. "It's a bit inconceivable to me that we'd want to be balancing any kind of budgets or such on the backs of small tech companies trying to [be] entrepreneurial and to grow."
Margolis isn't the only technology entrepreneur blasting the new proposal.
Pam Mackenzie is vice president of strategic planning at C2 Competitive Computing, which provides an array of software services to companies like University of Vermont Medical Center, Saint Michael's College and Orvis.
"Anything that impacts our bottom line, whether it's the gross or the net, is going to have an impact on our ability to grow," Mackenzie said Wednesday. "It will have an incredibly chilling effect on the growth of some of the best-paying jobs in the state."
"It will have an incredibly chilling effect on the growth of some of the best-paying jobs in the state." — Pam Mackenzie, C2 Competitive Computing
It isn't the first time Vermont's tech industry has waged this war. In 2010, Vermont lifted the sales tax exemption on software as a service, which is sometimes referred to as the "cloud tax." Two years later, at the urging of tech industry leaders, then-Gov. Peter Shumlin eliminated the tax.
However the landscape has changed since then, said Rep. Janet Ancel, chairwoman of the House Ways and Means Committee. According to Ancel, nearly 20 states now assess a sales tax on the kinds of services sold by companies like Social Sentinel and C2 Competitive Computing.
The House proposal would only affect cloud-based software. Ancel said her committee is sensitive to the concerns of business interests.
“Of course we want this sector of the economy to succeed," she said. "And we think they are succeeding, [and] we think that’s great."
But, Ancel said she isn’t convinced the tax will put a drag on Vermont businesses.
“When you consider that this many states already tax it, I think that competitive argument is a little less compelling,” Ancel said.
Margolis, however, said Vermont companies are already navigating hurdles that competitors in other states don’t necessarily have to, such as cost of living and a shallow pool talent to hire from.
"When you consider that this many states already tax it, I think that competitive argument is a little less compelling." — Rep. Janet Ancel, House Ways and Means Committee chairwoman
Cairn Cross, co-founder of FreshTracks Capital, runs a venture capital firm whose portfolio includes many tech companies. He said the services sold by software-as-a-service companies often cost thousands of dollars a month. The imposition of a 6% sales tax, he said, translates into real money.
“There's going to be a good percentage of those sales we think that you’re going to lose,” Cross said.
Republican Gov. Phil Scott isn’t dismissing the concept out of hand, and he said recently the tax "could be worth pursuing."
But Scott also says he’s reluctant to raise taxes this year, no matter who they target.
Scott's clean water funding plan redirected existing state revenues, instead of raising new ones. And with more than $70 million in organic revenue growth expected next year, Scott said lawmakers should be able to find a way to pay for the water cleanup without any new taxes.