The IT industry is a vital contributor to our economy. The U.S. market accounts for approximately 26 percent of the $3.6 trillion global industry, representing more than $950 billion in IT hardware, software, services and telecommunications. Through innovation and growth, domestic IT firms have remained globally competitive and economically strong.
Within this national IT industry, small and medium-sized IT companies employ approximately 1.8 million workers, while spending approximately $110 billion annually on payroll. While a range of policies may impact the state of the industry and its SMB component, few have a larger impact than the current tax code. Despite good intentions, too many outdated or unfair policies have proven to hamstring growth and innovation.
The tax code has continued to become increasingly complex, especially for SMB IT companies that do not have the resources to maintain large internal accounting and legal departments. As the tax code has grown, the cost of compliance (and potential for errors) has increased rapidly. Clearly, any efforts at tax reform should also include efforts to simplify the tax code and its compliance requirements.
A recent CompTIA (News - Alert) survey found that certain tax provisions and policies, such as payroll tax requirements, constrain potential growth of SMBs, curtailing their ability to invest in their own companies, hire high-skilled employees and as well as serve customers in a globally competitive fashion.
The IT sector is rightly concerned that tax costs and compliance divert their attention away from running and growing their businesses to meet market demands and compete on a global scale.
Accordingly, to address some of these tax concerns, CompTIA lays out four key principles of tax reform:
Simplify the Tax Code
The cost of compliance weighs heavily on SMB IT businesses. One in three (32 percent) indicated that payroll tax filings were the most costly/complicated tax requirement for businesses. We believe this burden could be lessened by allowing more small businesses to file an annual payroll tax return. Currently, only those employers with an annual payroll tax liability of $1,000 or less are allowed to file annually.
Reduce the Tax Burden on the SMB IT Industry
Six out of 10 (61 percent) SMB IT companies cite a reduction in payroll tax costs as a top concern. If the payroll tax were lowered, SMBs could hire more workers, which in turn will lead to increased economic growth nationwide.
Incentivize Growth and Innovation
Many start-up IT firms are economically unable to make needed investments in equipment, workforce and research. Tax reforms that provide greater incentives for investments should be enacted, such as a research and experimentation tax credit for small businesses that would allow companies to offset R&E tax credits against payroll tax liability. We can also encourage growth and investment by extending bonus depreciation and the Section 179 small business expensing allowance; each of these steps will enable small businesses to invest in technologies that improve productivity and quality of goods and services.
Protect SMB IT Firms from New Interstate Tax Compliance Burdens
A confusing web of overlapping state taxes will continue to increase compliance burdens for SMBs. Chief among these are taxes on businesses that do not have a physical presence or workforce within a given state. For any legislation that requires small business to collect sales taxes for foreign state taxing authorities, CompTIA recommends a robust small business exemption.
The strength of the IT industry relies on its ability to grow, innovate and adjust to market trends.
Tax reform should be a mechanism to promote additional growth and opportunity for the SMB IT industry.
Lamar Whitman is public policy director for CompTIA (www.comptia.org), a non-profit trade association working to advance the global interests of IT professionals and companies via advocacy, certification, education, and philanthropy.
Edited by Stefania Viscusi