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June 9, 2009

Tax reform bill angers businesses

By Whit Richardson

Legislature's approval of LD 1088, the controversial tax reform bill passed on Friday, has prompted at least one local company to consider moving out of state, and caused another to question its future. The bill awaits Gov. John Baldacci's signature.

Friday was the day Mark Stone, CEO of Reliable Networks, an IT company in Portland, signed a contract to move all his company's servers out of state, a preemptive response to the bill. He's now investigating the idea of moving his business to New Hampshire if Baldacci signs the bill into law. "It was pitched as tax reform. It isn't," Stone says. "It simply shifts burden from income tax to sales tax."

LD 1088 would decrease the income tax from 8.5% to 6.5%, increase the state's meals and lodging tax from 7% to 8.5% and expand the state's 5% sales tax to cover roughly 100 more goods and services. The Legislature passed the bill almost entirely along party lines, with Democrats supporting the bill. The expanded sales tax would cover "amusement, entertainment and recreational" services, including theater, movie and museum tickets, golf course fees, ski lift tickets and white-water rafting trips, and "installation, repair and maintenance services," including furniture restoration, vehicle repair and the maintenance of office equipment, according to the bill's text.

Stone's major objection to the bill is that the provision to expand the state's sales tax on maintenance and repair work is unclear. The way it's worded, he is unsure of how the tax would be applied to his IT services. Stone wrote a letter to each legislator on the Joint Committee on Taxation, asking for clarification and offering his services to help reword the bill to make it clearer when it comes to the murky area of sales tax and how it applies to a company like Reliable Networks that is not geographically bound. "While I trust good intentions of legislators who drafted this language, I can only imagine they had in mind the sort of local computer repair shops, or retail-oriented operations when they drafted this legislation."

He didn't receive any clarification and only one legislator sent him a boilerplate response. "Not getting any substantive response from the committee on taxation we felt we needed to be proactive in protecting our customers," he says.

Without any clarification, Stone is assuming the worst and that the sales tax expansion would apply to the maintenance work his four-person staff does from its Portland office for a company in Boston or Beverly Hills. He says that puts an anti-competitive burden on Maine-based companies like Reliable Networks -- he calls them "technology managed service providers" -- that does not exist for out-of-state companies. When Stone first got wind of the bill the company had just started a sales program to get large companies from New York City and Boston to relocate their disaster recovery racks of servers to Maine. "We stopped that because we can't be price competitive," Stone says. "We can't go in to a Fortune 500 company and ask them to put 5 racks of disaster recovery servers in Maine, but ‘oh, by the way, I can't give you a firm price because we might need to charge you a 5% sales tax.'"

IT companies are not the only ones affected by this new bill. Rick Snow, owner of Maine Indoor Karting in Scarborough, says the bill could force him to close his business.

Snow says the expanded sales tax on entertainment will cost his business as much as $40,000 in additional tax. Snow spent hours in Augusta protesting the bill. He asked the bill's sponsor, Rep. John Piotti, what's a business to do? He says Piotti's comment was to pass the added sales tax on to the customers. "It's not as easy as he says it is," Snow says.

In a tight economy, Snow says the competition for customers' entertainment dollar is already fierce. He worries that if he passes along the cost to the customers, they'll go elsewhere. And, since as much as 70% of his customers are from Maine, he says the additional expense will fall on locals, not the tourists the legislators claim would be hit hardest.

"We've cut expenses and costs to the maximum to keep our business in business. Most business owners are in the same position," Snow says. "And to add a 5% cost to doing business is a very significant impact and unfortunately it's not identified like that -- it's ‘we're lowering your income tax.'"

Snow attended a public hearing on the bill in April. He says people speaking in favor of the bill took up roughly 20 minutes, followed by nearly eight hours of testimony by business owners against the bill. At one point, Snow says the legislators tried to end the hearing and had to call in the state police to escort protesting business owners out of the chamber. "It was an eye-opening experience," Snow says. "I understood that businesses really were not treated well in Maine, but I didn't know how bad we were treated until I opened my own business. It's really been an eye-opening experience."

While business owners like Stone and Snow are opposed to this bill, the Portland Regional Chamber supports the bill and is lobbying for the governor to sign it. Baldacci has not indicated whether he will.

David Clough, director of the Maine chapter of the National Federation of Independent Business, says his members are firmly opposed to the bill. When he polled his couple thousand members in Maine, he says 82% of those who responded were opposed to LD 1088, with only 12% in favor. Interestingly, when asked about a gradual decrease of the income tax without the additional expansion and increase in the sales and meals and lodging tax, 71% of his members were in favor, with only 22% opposed.

A coalition of trade associations, chambers of commerce and businesses today submitted a letter to Baldacci outlining their opposition to the bill and urging him to veto LD 1088. Read the letter here.

Clough says his members' principle opposition is simple: The bill creates new taxes and expands existing taxes. He also says business owners are worried about the unknowns, the unintended consequences this bill could have in this sort of economy. "This is the biggest tax law change in at least 40 years," he says. "And we're taking a very big risk doing something like this in this economy, with so many unknowns."

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Reader comments

From Mark Turek (Tue 6/9/2009 4:41 PM)

This is bad legislation that not only angers businesses, it will hurt all Maine taxpayers. As a former employee for the State of Maine, I witnessed a steady stream of tax dollars being wasted on an almost daily basis for six years. Although we could use some good tax reform, what we really need to do is to stop the wasteful spending in Augusta.

In short, we need a better management team for all of our State's fiscal elements. It's time for some major changes at the top, otherwise the status quo will keep dragging us downward.

It's time to Veto LD 1088!

From Martha Nest (Tue 6/9/2009 4:44 PM)

I am a tax professional here in Maine. I specialize in tax preparation and planning for small businesses and I can tell you that this new proposal of switching the tax burden to the small businesses in Maine under the pre-tex that it will benefit the citizens is simply a maneuver by the Legislature to implement a tax increase. First, the "tourists" are not going to pay this - the people of Maine are. It will now cost more for the movies, the occassional dinner out, etc. so they won't go, the small business will make less money and the State will get less revenue (then our Income tax rate will go up to compensate for the reduced tax revenues). In my opinion, the bill as it applies to Reliable Networks will make them liable for sales tax on all its work no matter where the customer is located, because the work is generated in Maine. I am planning to relocate my business to another state because in the next round, they will tax my services which will cost my client more and make me less. The cost of living is just getting to high for me to live here. Other States and Towns get by on much less and offer more to their citizens than our State has every thought of - so after 25 or more years here - it is good by.  

From Tony Payne (Tue 6/9/2009 5:26 PM)

State government needs a more predictable revenue stream that only a re-mix of sources can accomplish. The trouble is, the take-aways for higher income folks will increase over time raising taxes along the way. In addition, Maine Revenue Services will interpret this law as liberally as possible while they scour the landscape for money. It will take years and thousands of dollars to clarify the intent but, in the meantime, jobs will head out of state or simply be lost.

If the Legislature could demonstrate they can control spending, or if they had baked it into the bill, then perhaps the bill should be signed - but it doesn't offer any restraint to a Legislature that spends every cent that comes in.

From Jim Ahearne (Tue 6/9/2009 6:14 PM)

The new tax bill, LD 1088 presents two very troubling problems for Maine concert goers, concert venues and the performing arts economy in Maine. First, a 5% tax on concert tickets will hurt Maine's ability to attract "A list" talent to perform in Maine, and second, the poorly worded exemption for non-profit presenters discriminates against commercial promoters and may expose non-profits to unintended tax liabilities.

Here's why there will be fewer touring bands playing concert venues in Maine if LD 1088 is signed into law. For a variety of reasons, including ticket sales via online ticketing platforms that operate across state lines, concert tickets are sold at their gross price with the sales tax rolled into the price. That is, a $35 ticket with a 5% sales tax is actually only a $33.33 ticket. In the concert business, musicians and bands are paid based on a combination of a talent guarantee plus or versus a % of ticket sales revenue. When net ticket revenue is reduced via a tax, the artist's net is less. Which city or venue gets a particular show almost always comes down to where the act could expect to earn more money in the appropriate setting. The gross potential is quite simply a factor of capacity times ticket price. Venues in Maine are not competing against each other for concert talent, they are competing against comparable venues in Portsmouth, Hampton Beach and Manchester, NH; Albany, NY; Worcester, MA; Providence, RI; and every other city within a 6 hour bus ride. A 5% tax on concert tickets will put all promoters in Maine and all venues, from the tax-payer owned Cumberland County Civic Center to community theaters and opera houses that rely on outside rentals, at a competitive disadvantage to venues and promoters taking a risk on talent just south of us. If there is a 5% tax on tickets, there will be fewer national touring performing artists and bands playing Maine.

New Hampshire does not have a ticket tax. Neither does Massachusetts. Along with Maine, all three states enjoy a thriving concert business that is outsize to their population. In other words, we get concerts here in Maine that, based on our population size alone, even in Portland, we have no business seeing coming to Maine. From Toby Keith to Wilco to the Jonas Brothers, engagements in Maine are often among the smallest grossing dates on the artist's tour. But our venues and promoters have worked hard to make the rent deals attractive to talent and have, at great investment and risk, cultivated a rich and vibrant concert market. On the other hand, Vermont does have a ticket tax, as does the city of Burlington. Only one reliable concert venue remains in Burlington, the heavily subsidized non-profit Flynn Theater. The state's most active venue, Higher Ground, is a 700 capacity club located across the town line in South Burlington where there is no city tax on tickets. Larger events in the state of Vermont are very limited, and even then, mostly to non-profit venues like the Shelburne Museum or colleges and universities, most of which are not in Burlington. There is no concert venue in Vermont that is equivalent to an arena like the Augusta, Bangor or Cumberland County Civic Center(s), in part because Vermont's tax policy is unattractive to the concert business.

Another problem in this bill for Maine's concert and live performance market is its supposed exemption for non-profits if, as the bill says, "all proceeds of the event or activity are used for the charitable purposes of that school or organization." Two points about this language: First, that provision is as good as a "Go Away" sign to all of the commercial concert promoters who bid to attract talent to Maine. We would be saddling our most active and entrepreneurial risk takers in this sector, the commercial promoters, with further risk and less incentive to gamble on an engagement in Maine. Secondly, the amended language is flawed. Because of the nature of almost all engagement contracts with talent, which allocate a % of the proceeds to the performer, even non-profit presenters share the proceeds of a concert with the artist, and therefore their events may be subject to the sales tax on tickets because they do not benefit from "all" of the proceeds.

The provisions in LD 1088 that tax tickets to concerts, festivals and live entertainment are bad for Maine's cultural vitality and performing arts economy. Touring performing artists and bands don't need to play Maine, but we want them to. We're not LA or New York, and we shouldn't pretend to be. Hopefully Governor Baldacci agrees with Neil Young that "Live music is better, bumper stickers should be issued," and he vetoes LD 1088.

Jim Ahearne
(formerly a concert promoter booking national talent in Maine, New Hampshire, Vermont, Rhode Island and Boston)

From Mark Kosakowski (Tue 6/9/2009 9:23 PM)

Just another example of how out of touch our Legislature is. Baldacci cluelessly extols the virtues of Maine as a "business friendly" environment that attracts new business. When will our government leaders learn that money does not grow on trees and shifting taxes does nothing to ease the tax burden? Haven't any of these people taken a basic economics course? Guns and butter, anyone??????? 

From Jim Bouchard (Tue 6/9/2009 10:51 PM)

Many of us have been fighting this bill for months. Too many small business people I talked to didn't want to take the time to join our efforts. Others believed this would never happen.

Here we are and now we have to deal with the current situation.

If you didn't join us before; you had better now. What the bill sponsors refused to believe is that the tipping point is not some arbitrary future possibility; it is here and now.

Our immediate recourse is this: call Governor Baldacci now, then later today, then again tomorrow.

Best thoughts,
Jim Bouchard
Brunswick
www.JimBouchard.org

From Wick Johnson (Wed 6/10/2009 8:23 AM)

Maine's current tax structure is badly out of balance. The sales tax is skewed by it's narrowness and overweight to cars and building materials. The income tax surges in good times and plumets in bad times. This proposed tax reform would move toward a more balanced less volatile income stream. This would make less money available for overspending in good times and lessen steepness of the decline in bad. Our regressive 8.5% income tax is a far greater evil than anything in this bill.  

From Bo Yerxa (Wed 6/10/2009 10:23 AM)

As a one-time resident of N.H. - whose brother still lives/works in that state - I am here to tell you that dispite the lack of an income or sales tax, you will pay the state, county or municipality every time you turn around. The grass may look greener, but...

IMHO it is long past time for some tax realignment in Maine, and while the newly-passed bill is not perfect, it will save the AVERAGE Maine taxpayer a few hundred bucks.

From Raymond Bald (Wed 6/10/2009 10:32 AM)

Although our state needs an improved tax policy that minimizes the volatility of state tax collections, the bottom line is that no one will have tax relief until the need for revenue gets under control. That means spending cuts. Spending is what drives what the state needs to collect for revenues. For too long, state legislators have focused on how to collect more revenue rather than how to limit spending. As long as the mentality in Augusta is that government should provide all things to all people, we will never bring spending under control. If Maine voters want such a government, they need to be willing to pay for it because it isn't free. However, the consequence will be more businesses leaving Maine.  

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