MONTPELIER – Vermont House passed sweeping tax law on Friday that includes sales tax on cloud-based software and services, as well as exemptions for military pensions and menstrual products.
Bill SB 53 began in the Senate as a proposed exemption from sales tax for menstrual products. However, by the time it got to the House, lawmakers embarked on a number of key changes to the corporate tax structure.
The House debated the legislation late into the night on Thursday – voted bit by bit – and then gave it final approval on Friday.
The cloud tax provisions were pushed largely partisan by 96-44 votes on Thursday evening, with Republicans opposed to the measure. Some Vermont lawmakers and members of the technology sector have raised concerns about the levy and the burden it will place on businesses.
The measure would remove an exemption for software programs stored and accessed by users over the Internet, which would result in a 6% sales tax. It would also impose sales tax on cloud infrastructure services like data storage, networking, and website hosting. The tax would apply to a number of different online services, including those offered by TurboTax, Dropbox, Mailchimp, and website hosts like Squarespace and WordPress.
Cloud tax advocates say it keeps Vermont’s tax system in step with the changing economy. Twenty-one other states also have some form of cloud tax.
17 states started taxing cloud services in 2019, said Rep. George Till, D-Jericho. Since then, that number has grown rapidly.
“We won’t be in the minority here for long. This is where the economy is moving forward and if we don’t keep up we will have really significant problems, ”Till said during Thursday’s debate. “I would like to urge people to support this as it will be vital for us to do so in order to keep up with developments in the economy.”
Other lawmakers argued that during a pandemic, when businesses are tense, the best time to add new taxes is not.
“I think this is incredibly bad timing to add tax and cost burdens to those who use these and our small businesses who use them,” said Rep. Anne Donahue, R-Northfield, Thursday. “And it is an incredibly bad time to look at and revise any part of our detailed tax policy when we are having trouble legislating for Zoom.”
Rep. Janet Ancel, D-Calais, chair of the House Committee on Ways and Means, said Thursday that lawmakers are aware of the challenges businesses are facing during the pandemic. She said the cloud tax rules wouldn’t go into effect until June 2022. They are expected to generate approximately $ 14 million in tax revenue in fiscal 2025.
During a press conference on Friday, Republican Governor Phil Scott said, without going into detail, that he is against a cloud tax.
The bill would also change how the state determines tax liabilities for companies operating in Vermont and other states.
Corporate taxes are currently calculated based not only on the sales revenue that Vermont companies make, but also on the number of employees they hire and the real estate they own in the state. The invoice would change the code so that a company’s tax charge is based only on its in-state sales.
Legislature has said this could help encourage companies to settle in Vermont and keep employees in the state. Proponents of the change also argue that Vermont is the only New England state that uses factors other than sales to determine corporate tax liabilities, which puts it at a competitive disadvantage.
While this provision was passed by 129 to 6 votes on Thursday, some spoke out against lowering corporate taxes. According to the Joint Tax Office, the move would result in a loss of $ 20 million in corporate tax revenue per year – although the bill includes other changes to offset those dollars.
Rep. Selene Colburn, P / D-Burlington, who voted against the corporate tax change, said it would largely benefit Vermont’s top 100 corporate tax claimants.
“I think I just have trouble understanding why this is a priority for our state right now, especially on the other side of a tough debate that asked teachers and government officials to pay more out of their pockets to meet some of the obligations of the State to meet. Colburn said, referring to a proposal the House legislature put on the table in March that would have cut pension benefits for public employees.
Under the current system, many companies make Vermont sales but have no physical presence or employees in the state, said Rep. Scott Beck, R-St. Johnsbury, a proponent of the proposal. He argued that the state does not currently tax these companies with their “full liability” as Vermont’s tax system is “based on payroll and property.”
“Some people might look at it like we’re not taxing some of the companies in our state as heavily, but we’re going to tax the companies outside of our state that have a large sales presence in Vermont more than we are right now,” said Beck.
Till said the changes would benefit smaller state-owned companies and shift some of the burden to “larger overseas companies doing business in Vermont rather than those creating jobs here in Vermont.”
Additionally, the bill would make it difficult for some of the richest companies doing business in Vermont to avoid paying taxes. According to Rep. Emilie Kornheiser, D-Brattleboro, at least 10 Vermont companies have annual sales of more than $ 300 million but only pay $ 750 in taxes – the current minimum tax for those earners. The bill would require companies making $ 300 million or more in Vermont to pay at least $ 100,000 a year.
If it became law, the law would also exempt the first $ 10,000 veterans annually as a military retirement pension from state taxes. For years, Scott has urged lawmakers to exempt military pension income, which is a priority in his budget proposals.
Rep. Laura Sibilia, I-Dover, proposed an amendment Thursday to extend this exemption to the first $ 30,000 of retirement income.
Vermont is one of seven states that don’t offer military retirement relief, and the retirement income exemption would help encourage retirees to move or stay in Vermont, Sibilia said.
The governor also said Friday that a $ 10,000 exemption would not go far enough.
“I think it should be a complete exception,” said Scott.
The Committee on Means and Ways rejected the amendment. Kornheiser, the committee vice chairman, said there was no evidence that the exception “is an effective recruiting tool”.
She said that keeping the $ 10,000 exemption cut off all annual benefit for a “large swath” of military retirees.
“If we go beyond that, we will bring in higher-paid retirement income for civil servants who have higher solvency,” she said.
The legislature rejected the amendment with 79-55 votes.
The tax return is now going back to the Senate.