The Vermont House passed a wide-ranging tax bill Friday that includes a sales tax on cloud-based software and services, as well as exemptions for military pensions and menstrual products.
The bill, S.53, started out in the Senate as a proposed sales tax exemption for menstrual products. But when it reached the House, legislators tacked on a number of major changes to corporate tax structure.
The House debated the legislation late into the night Thursday — voting on it piece-by-piece — and then gave it final approval Friday.
The cloud tax provisions advanced largely along party lines Thursday night on a vote of 96-44, with Republicans opposing the measure. Some legislators, and members of Vermont’s technology sector, have raised concerns about the levy and the burden it could pose on businesses.
The measure would remove an exemption for software programs stored and accessed by users over the internet, thereby resulting in a 6% sales tax. It would also impose a sales tax on cloud “infrastructure” services, such as 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 such as Squarespace and WordPress.
Proponents of the cloud tax say it would keep Vermont’s tax system in step with the changing economy. Twenty-one other states also have some form of cloud tax.
Seventeen states began taxing cloud services in 2019, said Rep. George Till, D-Jericho. Since then, that number has quickly increased.
“We’re not going to be in the minority here for very long. This is where the economy is going, and if we don’t keep up with that, we are going to have really substantial problems,” Till said during Thursday’s debate. “I would urge people to support this because it’s going to be critical for us to do this to keep up with what’s happening in the economy.”
Other legislators argued that during a pandemic, when businesses have been strained, is not the best time to add new taxes.
“This is, I think, incredibly bad timing to add tax and cost burdens on individuals who use these, on our small businesses who use these,” Rep. Anne Donahue, R-Northfield, said Thursday. “And it’s an incredibly bad time to be looking at and reworking even some of our detailed tax policy when we’re struggling [to legislate] on Zoom.”
Rep. Janet Ancel, D-Calais, who chairs the House Committee on Ways and Means, said Thursday that legislators were aware of the challenges faced by businesses during the pandemic. She said that the cloud tax provisions would not take effect until June 2022. They’re expected to raise about $14 million in tax revenue in Fiscal Year 2025.
During a press conference Friday, Republican Gov. Phil Scott said without elaborating that he opposes a cloud tax.
The bill would also change how the state determines tax liabilities for corporations that operate in Vermont and other states.
Corporate taxes currently are calculated not only by considering the amount of sales that corporations generate in Vermont, but also by how many employees they hire and the property they own in the state. The bill would change the code so that a company’s tax burden would only be based on its in-state sales.
Lawmakers have said this could help encourage businesses to locate in Vermont and keep employees in the state. Supporters of the change also argue that Vermont is the only state in New England that uses factors other than sales to determine corporate tax liabilities, putting it at a competitive disadvantage.
While that provision was approved Thursday by a vote of 129-6, some said they opposed cutting corporate taxes. According to the Joint Fiscal Office, the measure would lead to a loss of $20 million in corporate tax revenue each year — though the bill offers other changes to make up 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 filers.
“I think I’m just struggling to understand why that’s a priority for our state right now, particularly on the other side of a tough debate that asked teachers and state workers to pay more out of their pockets to meet some of the state’s obligations,” Colburn said, referring a to proposal House lawmakers put on the table in March that would have cut pension benefits for public employees.
Under the current system, many corporations generate sales in Vermont but don’t have a physical presence or employees in-state, said Rep. Scott Beck, R-St. Johnsbury, a supporter of the proposal. He argued the state is not currently taxing these companies at their “full liability” because Vermont’s tax system “is based off of payroll and property.”
“Some people might look at this as we’re not going to maybe tax some of the corporations in our state as much, but we’re going to tax the corporations outside of our state that have a large sales presence in Vermont more than we are right now,” Beck said.
Till said the changes would benefit smaller in-state companies and shift some of the burden onto “bigger out-of-state companies who do business in Vermont, instead of those who are creating jobs here in Vermont.”
In addition, the bill would make it harder for some of the wealthiest corporations that do business in Vermont to avoid paying taxes. According to Rep. Emilie Kornheiser, D-Brattleboro, at least 10 corporations make more than $300 million in sales in Vermont each year but pay only $750 in taxes — the current corporate minimum tax for those earners. The bill would require corporations that make $300 million or more in Vermont to pay a minimum of $100,000 each year.
If it became law, the legislation would also exempt from state taxes the first $10,000 that veterans receive each year in military retirement pay. For years, Scott has asked lawmakers to exempt military pension income, making it a priority in his budget proposals.
Rep. Laura Sibilia, I-Dover, proposed an amendment Thursday to expand this exemption to the first $30,000 of retirement income.
Vermont is one of seven states that does not provide any level of military pension relief and exempting the retirement income would help encourage retirees to relocate or stay in Vermont, Sibilia said.
The governor also said Friday that a $10,000 exemption doesn’t go far enough.
“I think it should be a full exemption,” Scott said.
The ways and means committee opposed the amendment. Kornheiser, the vice chair of the committee, said there was no evidence that the exemption “is an effective recruitment tool.”
She said that keeping the exemption to $10,000 exempts the entire annual benefit for a “large swath” of military retirees.
“As we go above that we bring in higher paid officers’ retirement income who have a greater ability to pay,” she said.
By a vote of 79-55, lawmakers opposed the amendment.
The tax bill now heads back to the Senate.
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