Could the proposed Pa. tech tax threaten Philly's status as a 'lean startup's paradise'? - Technical.ly Philly

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May 18, 2017 10:27 am

Could the proposed Pa. tech tax threaten Philly’s status as a ‘lean startup’s paradise’?

Attorney Ernie Holtzheimer lays out the stakes of Gov. Wolf's plan to revitalize a '90s-era tax.

Governor Tom Wolf at #PTW17.

(Photo by Roberto Torres)

This is a guest post by attorney Ernie Holtzheimer.

If you are running a tech company in Philadelphia and happen to be thinking about taxes, you may want to take your mind off of city wage and soda tax and focus on the potential revitalization of Pennsylvania’s “tech tax.”

In an attempt to help close a $3 billion deficit, Pa. Gov. Tom Wolf’s proposed 2017-2018 budget includes reinstating the state’s 1991 tech tax, which was initially introduced by Gov. Robert P. Casey. Facing a large budget gap, Casey extended the state’s sales and use tax to additional professional services, including a variety of computer services. After intensive lobbying from members of Pennsylvania’s technology industry, however, the tax was repealed in 1997.

Since 1997, Pennsylvania law has exempted “computer programming, computer integrated systems design, computer processing, data preparation or processing, information retrieval, computer facilities management and other computer-related services” from being subject to Pennsylvania sales and use tax. Companies in the tech industry have enjoyed this exemption for two decades, but Wolf is seeking to change that.

Wolf’s current budget proposal would remove the tech tax exemption, subjecting companies in these industries to an additional 6 percent tax. While this is expected to raise as much as $356.8 million for the state, the tax could significantly impact companies within our startup community, where every dollar counts toward supporting growth.

Although the state predicts a positive economic impact from the exemption’s removal, the truth of the matter is that it could be quite the opposite — especially for the state’s tech hubs, such as Philadelphia and Pittsburgh. The additional tax would be compounded on top of the city taxes companies already pay, which could reasonably lead to more companies leaving Philadelphia in search of greener pastures, in the form of a more affordable locale.

When asked “Why Philadelphia?” many companies based here currently cite to the city’s affordability relative to other major cities across the country, amongst other things. Though the city wage tax may deter some people from working here, Philadelphia generally offers an affordable cost of living and easy access to other major cities, if needed — “a lean startup’s paradise,” as Philly Startup Leaders President Robert Moore once put it. Tacking on an additional 6 percent tax on revenues, however, could change all that.

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Nevertheless, as it stands, Wolf’s proposal is just that — a proposal, and we’ve seen this proposal before in 2011 from Gov. Ed Rendell, so we will see what happens when the budget is approved before the July 1 deadline.

In the meantime, organizations within the tech industry are joining forces once again to lobby against the proposal, and they could certainly use additional support. The Philadelphia Alliance for Capital and Technology (PACT) recently announced that it will join the Pittsburgh Technology Council and the Central Pennsylvania Technology Council in Harrisburg on June 6 to push back against Wolf’s proposal. If you don’t agree with Wolf’s proposal, there is still time to contact your senators and representatives or to join the effort in Harrisburg on June 6.

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Ernie Holtzheimer

Ernie Holtzheimer is an associate at Montgomery McCracken Walker & Rhoads LLP where he handles matters involving entity formation, commercial contracts and intellectual property protection. He also has a broad range of experience handling a variety of legal issues in areas including nonprofit organizations, higher education law and securities law. When he’s not in his office or at a local tech event, you can find him with his dog, Zoey, or doing everyday things like trekking to Mt. Everest Base Camp.

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