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Illinois Considers Taxing Custom Software 369

Posted by timothy
from the starring-nobuko-miyamoto dept.
Foobar_Zen writes "Illinois Governor Rod Blagojevich is proposing to tax custom software; he is hoping to generate $64 million. You can read the story at burrwolff.com. I am wondering if there any other states that currently tax for custom software? How is this going to affect Illinois? What does this do to independent application and software developers?" And what about software that adds value but itself is available without charge?
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Illinois Considers Taxing Custom Software

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  • by deego (587575) on Wednesday May 12, 2004 @06:57AM (#9125285)
    I guess 10% of 0 is still 0 ;-)
    • by jellomizer (103300) * on Wednesday May 12, 2004 @07:16AM (#9125393)
      Well the trick is to find a Programmer who will do all this custom software development for free? Custom Software development usually always paid. Because with "Free" Custom Software development, first you will need to find a programmer willing to do it for free, which will be hard because a lot of custom software development is usually quite boring and the programmer will not get much credit outside the company that is using it. But say you did find someone to develop it for you for free the next trick is keeping them motivated to get it done,"its free so they can take as long as they want its not hurting them any", plus if the person is doing it for free then they probably have a paying job or are in school, the slim possibility of being independently wealthy. But in most cases the job will be worked on part time at best. So by the time the application gets done it will be a long time. and probably a lot of loss productivity.

      Also most Custom Software doesn't bother with any sort of licensing basically as the programmer makes the code and sends it to the customer and they pay him for his hours the code is their they can do whatever they want with it.

      • by Tim C (15259) on Wednesday May 12, 2004 @07:28AM (#9125444)
        Also most Custom Software doesn't bother with any sort of licensing

        That's because it's the very definition of a work for hire - the programmer is hired specifically to create that work on behalf of their employer. At the end of it, I think everyone would expect to own what they had paid to be created.
      • by cygnusx (193092) * on Wednesday May 12, 2004 @07:28AM (#9125448) Homepage
        Also most Custom Software doesn't bother with any sort of licensing basically as the programmer makes the code and sends it to the customer and they pay him for his hours the code is their they can do whatever they want with it.

        In quite a few countries "service tax" (or "value added tax") is charged on this sort of transaction. Both are a flat rate tax on the billed transaction. It doesn't really matter if the software you use is libre/gratis, as long as your bill amount is nonzero.
      • by Afty0r (263037) on Wednesday May 12, 2004 @07:30AM (#9125460) Homepage
        Also most Custom Software doesn't bother with any sort of licensing basically as the programmer makes the code and sends it to the customer and they pay him for his hours the code is their they can do whatever they want with it.

        I don't know if that is the case in the US, but that's definitely wrong in the UK. If a company pays a contractor/freelancer to write some code, the contractor/freelancer still OWNS the code in question UNLESS an agreement is signed transferring ownership of the work. - This catches many companies out.
        • by Dr. Evil (3501) on Wednesday May 12, 2004 @08:01AM (#9125645)

          In Canada, as I understand it, unless there is a contract saying otherwise the copyright is in the hands of the entity who hired you to write it -- but you still have some very small rights as the author... For instance, another individual can't slap their name on the code and declare it their creation, nor can they modify it and leave your name on it without citing that the code was modified. Note that they can remove your name altogether and just leave the copyright notice... which is pretty normal... I've had that done to me with documentation in my workplace many times.

          This is somewhat sensible in that the company/person who commissioned the work provided everything which was needed for that software to be authored, including money to compensate your time. If it were not for them, the software would not be written. I think this is very similar to the way it works in the U.S.

          The "author" normally must destroy all their copies of the code upon leaving, and they're not allowed to design a similar solution for anyone else. That last aspect is, IMHO, grey, fuzzy and awful... get a contract before doing contract work like this.

          I'm surprised it isn't like that in Britain. Canada's laws are normally quite close.

      • I'd write the custom software for free... just as long as they paid me a decent hourly rate to drink coffee while I was doing it! ;-)

  • Yeah right. (Score:5, Insightful)

    by Willeh (768540) <rwillem@xs4all.nl> on Wednesday May 12, 2004 @06:58AM (#9125287)
    I doubt this could ever go through, since the definition of 'custom software' is too vague. Would this tax me if i installed a copy of ms office with custom options? What about 3rd party plugins (paid for by me, or free)? What about rolling my own linux kernel? Or even making my own distro. And as for little programmer shops that would ultimately feel the heat, does this mean that when they package up their software and put it up on a shelf it's no longer "Custom software"? Bad idea, bad definition, bad enforceability, bad tax revenue idea.
    • Re:Yeah right. (Score:3, Insightful)

      by kahei (466208)

      Plenty of ambiguity -- good news for lawyers, bad news for business. Presumably they intend to figure out some long and complex definition of 'custom software' at a later date.

    • Re:Yeah right. (Score:5, Interesting)

      by Roger Keith Barrett (712843) on Wednesday May 12, 2004 @07:19AM (#9125412)
      I did RTFA, and I still agree that "custom software" is too vague and might be an undefinable concept.

      The problem here, once again, is that the creation of software is being defined as a corporate-only or business-only activity.

      Since government can't usually see beyond their corporate buddies. This could screw up all types of non-srinkwrapped software, not just OSS but freeware and shareware as well.
    • Re:Yeah right. (Score:3, Interesting)

      by cbr2702 (750255)
      I think part of the idea is that currently custom software is both defined and exempt from tax (unlike prepackaged retail software) and one possibility here is that they would eliminate the distinction and take their 6.25%.
      • Re:Yeah right. (Score:5, Insightful)

        by pegr (46683) * on Wednesday May 12, 2004 @08:18AM (#9125747) Homepage Journal
        I think part of the idea is that currently custom software is both defined and exempt from tax (unlike prepackaged retail software) and one possibility here is that they would eliminate the distinction and take their 6.25%.

        That's what has always bugged my about packaged software. According to the vendor, I don't own the software, I merely license it. If I don't own it, I didn't buy it. If I didn't buy it, then why am I paying sales tax on the "purchase"? If they argue that I own the media but not the contents, then why do I pay sales tax on the full amount and not just the portion of the sale related to the physical media?

        Mildly off-topic, but it does relate...
        • Re:Yeah right. (Score:3, Informative)

          by Hektor_Troy (262592)
          Hmm ...

          Is sales tax tacked onto the bill, when you lease a car?
          • Re:Yeah right. (Score:3, Interesting)

            by JGski (537049)
            In the US, you do pay sales tax on the lease payment itself (you're buying 1 month of service or use of the vehicle).

            The cashflow implications of this tax are one of the pro's of leasing: "buying" you pay all sales tax on the entire purchase price at time 0, while "leasing" you pay k/N sales tax of the entire purchase price spread over time 0 to N, where k is the ratio of residual to purchase price (typ. 0.5-0.8) and N is the number of payments, typically 36-60. The NPV of the sales tax is far less on a

        • Re:Yeah right. (Score:3, Insightful)

          Do you pay sales tax on a rental car?

          hint: yes, you do.

          'nuff said.

    • Re:Yeah right. (Score:3, Insightful)

      by NineNine (235196)
      Bad idea, bad definition, bad enforceability, bad tax revenue idea

      Congratulations! You just summed up the US income tax laws in a nutshell! If this passes, there'll be legions of lawyers, accountants, and politicians who do nothing but add more and more shit to this law ("an office suite, but not one used my more than 4 users, whatever"). IT'll become a rats-nest of laws that nobody other than people who spend 20 years studying it can understand. Very typical of US tax laws.
      • Re:Yeah right. (Score:4, Interesting)

        by astar (203020) <max.stalnaker@gmail.com> on Wednesday May 12, 2004 @09:31AM (#9126391) Homepage
        This is a state tax issue, since a Governor was proposing it.

        Currently, in the state of Washington, shrink wrap software gets a sales tax, but custom does not. My old employee, TOM Software [tom-software.com] makes a complicated full-featured multi-user accounting package which pretty much requires a reseller to install it. The software is typically customized by the reseller for the end user client. TOM Software did not figure they were selling shrinkwrap, but started being taxed. They went to court, and they lost.

        The court case was probably ten years ago. As I recall, they took it up to appeals court, so in this state, it is all very official. I have not read the court decision. If you are going to look it up, TOM Software was know as Northwest Source Group at the time.

    • Re:Yeah right. (Score:5, Informative)

      by Jaywalk (94910) on Wednesday May 12, 2004 @08:28AM (#9125817) Homepage
      the definition of 'custom software' is too vague
      But that's not what the article says. While the header says they're going to tax "custom software" the article says that the issue is really licensed software. He's trying to erase the distinction between software that is sold and that which is licensed and is proposing to tax the licensing fees. There is currently no tax on licensing fees.
  • by Anonymous Coward on Wednesday May 12, 2004 @06:58AM (#9125289)
    Not too hard to figure out - pay $10 million for a custom system in Chicago, or pay $9.5 million for the same system in Gary, Indiana.
  • by Black Rabbit (236299) on Wednesday May 12, 2004 @06:59AM (#9125290)
    ...and who gets to define it?
  • this one is easy (Score:2, Interesting)

    by dhuv (241988)
    Just sell a license for a lifetime. You can just sell them licenses each time you charge for changes.
  • by peterdaly (123554) <petedaly@ix.[ ]com.com ['net' in gap]> on Wednesday May 12, 2004 @06:59AM (#9125295)
    And what about software that adds value but itself is available without charge?

    I would think this has to be executed as a sales tax, where the tax is applied to the billed amount on the invoice. Value but no charge would be next to impossible to implement and audit.

    -Pete
  • Oh joy (Score:5, Insightful)

    by JosKarith (757063) on Wednesday May 12, 2004 @07:00AM (#9125301)
    Yay! Just what the world needs, more archane, archaic taxation systems that mean that you have to employ people just so you can be sure that the government is taking the right amount of money from you.
    And if you pay too much - forget it, you'll never see that money again. If you pay too little, they'll take you to court and add huge fines.
    You can't win, you can't break even, and you can't even quit the damn game.
    • Thank you, Jos. You took the words right outta my mouth.
    • Re:Oh joy (Score:3, Insightful)

      by Lumpy (12016)
      no it simply will start to erode the Chicago Tech and business areanas..

      Businesses espically BIG businesses have no problem uprooting and and relocating to save money. Illinois is just trying to figure out how to get rid of those pesky businesses that pleague their cities.

      This is a proposal drafted by someone that has no clue.
    • Re:Oh joy (Score:3, Informative)

      by cperciva (102828)
      Yay! Just what the world needs, more archane, archaic taxation systems...

      I think you're missing the point. This change simplifies the tax system: Instead of having a special tax exemption for "custom software", there is one sales tax which applies to all software.

      This isn't adding a special tax; this is removing a special tax exemption.
      • by The Rizz (1319) on Wednesday May 12, 2004 @07:57AM (#9125613)
        This change simplifies the tax system: Instead of having a special tax exemption for "custom software", there is one sales tax which applies to all software.

        You're wrong about that. There is no "special tax exemption" in place here - custom software development is generally a "work-for-hire" situation. If someone develops custom software for a company, they get paid for the time spent on it. This is paid either as an employee of company (i.e. the standard paycheck), or as an independant contractor (billable hours).
        In neither case is a bill of sale presented by the programmer to the company in question. In fact, in most (all?) states, you aren't even required to get a sales tax license if all your work is consultant in nature (which this would be considered).

        Also, it is already taxed - namely income tax. This payment is even reported to the IRS - either as a paycheck to the employee (W-2) or as an outside programmer (1099-MISC).

        What this bill is proposing (among other things) is add a new tax to custom development, by requiring the payment of sales tax in addition to the income tax already being paid on it.

  • by zz99 (742545)
    And what about software that adds value but itself is available without charge?

    Well, 6.25% of 0 is... 0

    (For those too lazy to read the article, the new tax is on "software licensed or leased by the developer", currently not taxed)

  • The governor estimates a business tax increase of $64 million by eliminating the distinction between canned software sold at retail (subject to sales tax), custom software (subject to service occupation tax on the value of tangible personal property transferred with the software) and software licensed or leased by the developer (currently not taxed).

    Could anyone more knowledgeable about law explain the implications of this?
  • by acehole (174372)
    Would the governor pay tax for software he buys?

  • Article text (Score:5, Insightful)

    by SmackCrackandPot (641205) on Wednesday May 12, 2004 @07:01AM (#9125308)
    The relevant section reads:

    1. Initiate sales tax on custom software: The governor estimates a business tax increase of $64 million by eliminating the distinction between canned software sold at retail (subject to sales tax), custom software (subject to service occupation tax on the value of tangible personal property transferred with the software) and software licensed or leased by the developer (currently not taxed). The Governor's proposal would either repeal the Department of Revenue regulation that distinguishes between a sale and a license of software or create an entirely new tax on revenues from software licensing.

    If I were a company director, the first reaction would be to see if open source software exists to do the same job, and if it were cheaper to hire/contract to write inhouse software. Looks like this would hurt contractors/small companies than anything else.
    • Re:Article text (Score:2, Informative)

      by Katharine (303681)
      Here is what the budget itself says (444 page document found at http://www.state.il.us/budget/FY05%20Budget%20Book .pdf): [state.il.us]

      (page 20)
      Business Sales tax loopholes that will be closed focus on large businesses and luxury watercraft.
      Sales taxes will increase $98 million as a result of these adjustments. The following are the sales tax changes:
      Limit the farm chemicals tax exemption to include only small farms - $27.0 million
      Collect sales tax on software packages (currently paid by consumers but not by busin
    • Re:Article text (Score:4, Interesting)

      by n1ywb (555767) on Wednesday May 12, 2004 @07:35AM (#9125496) Homepage Journal
      I think you hit the nail on the head. This is like hammering another nail in the coffin of American computer engineering. It's the LAST thing our ailing computer industry needs right now. Even if it will indirectly benefit open source, I'd hate to see any contract programmer put out of business.
    • Re:Article text (Score:3, Interesting)

      by Rupert (28001)
      Since almost all software sold at retail is, according to the software developers concerned, licenced or leased rather than sold, does this mean that I don't have to pay sales tax on, say, Windows XP Pro if I buy it in Illinois?

      Alternatively, if I *do* pay sales tax on it, does that mean I retain all my first sale rights, including the right to transfer it? Can I stop eBay from taking down my auction when I want sell my copy of XP? Can I force Microsoft to reactivate the product key when I do sell it?
  • by SavedLinuXgeeK (769306) on Wednesday May 12, 2004 @07:01AM (#9125309) Homepage
    The matter of the fact is, is that if this causes too many problems, people will just leave the state, or stop producing software. Then when the Govenor realizes that his tax is not working, or that he is causing a brain drain effect, he will wisen up. Taxing something as amorphous as custom software is a great folly, and honestly, people will not stand for it.
  • by spooje (582773)
    I just wonder how big the check from the Indian government was. There's no better way to kill any possible IT revival in this country than to tax it to death. Way to go Illinois!
    • Re:Welcome India (Score:3, Insightful)

      by Art_XIV (249990)

      I think that spooje is making a valid point albiet a left-handed one.

      Many slashdotters attribute the off-shoring phenomenon to the greed of corporate MBAs but fail to give the tender mercies of our own government(s) proper credit.

      How much of the added expense of keeping a US developer on payroll, vs an Indian developer on contract, is due to direct taxation (Social Security, Unemployment Insurance, Workmans Comp.) and indirect taxation that the employer and employee have to cover?

  • The governor estimates a business tax increase of $64 million by eliminating the distinction between canned software sold at retail (subject to sales tax), custom software (subject to service occupation tax on the value of tangible personal property transferred with the software) and software licensed or leased by the developer (currently not taxed).

    The story made it sound like there was going to be a new tax on all software created and not sold in a retail store. However, reading the article carefully,
    • As noted above, software licensed or leased by the developer will not be taxed,

      Software licensed or leased by the developer is currently not taxed, canned software and custom software are currently taxed under different mechanisms. If you read the rest of the article you'll see that

      The Governor's proposal would either repeal the ... regulation that distinguishes between a sale and a license of software

      ie: canned software and software licensed by the developer would be treated equally and therefore sub
      • In either event, software licensed or leased by the developer will be taxed in some way.

        It already is in the form of the state and federal income tax on the business or individual writing or distributing the software. Sales taxes are just "extra" taxes that the states impose because they can.

  • by shoppa (464619) on Wednesday May 12, 2004 @07:02AM (#9125315)
    Some proposals that have circulated in the US congress could have limited the flow of open source software across international borders and/or taxed the open-source software at some arbitrary value supposedly related to commercial packages. These proposals never got out of the press release stage, at least as far as I can see. And it was probably never worthwhile to worry about them, as very press-release level laws get any more than the most minimal attention. (OTOH RIAA press releases seem to be closely scrutinized here... and they aren't even a lawmaker or lawmaking body!)

    At least the proposed Illinois tax only appears to only tax the cash that changes hands. But again, it's only at the press release level and there's no real wording that I've seen.


  • So, the software component of a service that I provide is taxed as if it were shrink-wrapped software, and everything else (business analysis, support, etc) is taxed as before. What an extraordinary extra burden on both service provider and customer. Just the mechanics of deciding what is 'custom software', what is integration work on off-the-shelf software, and what is enhancements to existing systems makes my head hurt already.

    Is this some sort of stealth plan to wind down the Chicago financial center
  • Illinois loses all in-state software development. Thousands laid off as those jobs are sent overseas.

  • by mrtrumbe (412155) on Wednesday May 12, 2004 @07:05AM (#9125333) Homepage
    Yesterday, Blagojevich dismissed out of hand a casino proposal the mayor of Chicago had proposed, threatening to veto any legislation the mayor was able to get passed. He did so in part because it would "prevents us from making the hard decisions that are necessary to continue to reform the system here in Springfield and get our fiscal house in order." Basically the message was, no quick fix until the budget comes under control. Read more about it here [chicagotribune.com] ("free" registration required).

    Now today, we get his quick fix plan to tax custom software! And I'm sure we'd all agree this is much better than a casino in Chicago, right? Right??

    Bah! Me no like politicians.

    Taft

  • Why cna't human beings, particular the borderline variety known as politicians, get it in their head that just because [insert abstract concept here] exists, it is not a target for taxation. A much more fair and more logical system exists. That is, we decide what things need to be bought in common (military defense, roads, city water) and then we decide who it is that benefits from it the most. For defense, we'd all chip in, but that water main put in for the corporate headquarters that just moved in... wel
  • by rel48 (756414) on Wednesday May 12, 2004 @07:07AM (#9125354)
    Writing software is a service. So is legal work, plumbing, lawn mowing, ... If they're going to tax custom software, then _all_ services should be taxed.
    • At least here in Brazil they are.

      There is a TAX called "ICMS" (Tax over circulation of services and merchandise) that you have to pay if you sell stuff or if you are contracted as a professional to do some job. You as a service provider must have a registration under the city hall so they can track your profits.

    • In Iowa, the governor proposed taxing services - at least all services except for those provided by lawyers - they are practicing a "constitutionally protected" service and shouldn't be taxed (and he is a lawyer).

      I have no problem with goods being taxed. I don't think that food and clothing should be. I really don't think that services should be taxed.

  • If there is an existing service tax in the state, then I could see where custom programming is a service and subject to tax laws. However, if I am reading this correctly (good chance I am not its 7AM and only 1 cup of coffee so far) the idea is almost as stupid as the idea of collecting sales taxes for every county/city in the US.

    Maybe they'll outsource the custom programming to Missouri or Indiana er... India.

    Offtopic, but on the case of collecting sales taxes online, how is a online business differen

  • by AtariAmarok (451306) on Wednesday May 12, 2004 @07:15AM (#9125389)
    These people forget that if you tax an activity, it serves to discourage the activity. What this does is discourage software programming in Illinois.
  • Easy way out... (Score:3, Interesting)

    by alispguru (72689) <bane AT gst DOT com> on Wednesday May 12, 2004 @07:18AM (#9125402) Journal
    The software is free, and copyrighted, and useless without a dongle.

    The dongle costs $$$. The only "custom" software in it is the authentication key, and if they're going to tax that, they'll have to tax RFID chips too.

    Any other problems?
    • The dongle would be taxed using sales tax as it is a material object. So the full price would be taxed by the relevant jurisdiction's sales tax. That's not an easy way out at all. It is certain to create a tax problem.
  • by thogard (43403) on Wednesday May 12, 2004 @07:22AM (#9125417) Homepage
    Most countries that have a sales tax also have a tax on services. In Europe its called VAT and in Oz/NZ its called General Sales Tax (GST). If they start this, I expect it won't be long before every service is taxed just like current sales tax which sort of makes sense in a service economey. Of course the better solution would be get better value for our tax money.
  • Tech Support (Score:3, Interesting)

    by bigattichouse (527527) on Wednesday May 12, 2004 @07:22AM (#9125420) Homepage
    Well I will just have to give them the software for free, but charge them a monthly fee for potential support calls. I'll probably get a much better revenue stream that way.
  • Why does the governmet insist on defining software creation as a corporate-only activity?

    should I put on my tinfoil hat now?
  • I don't write custom software. I write commercial software that is so specialized that I only have one customer who buys it. It is not my fault that nobody else wants an application that opens the XBS Database and runs some queries on it. If they are out there they should call in and I can sell them the software. But I don't have the funds to advertise it so I only have one customer. But being a good business I listen to what my customers have to say about the product and in future releases I add feature
  • by gillbates (106458)

    As both a resident of Illinois and a freelance developer, this doesn't look good. While my paying clients might not like having to fork over another 5 - 10% above their quoted price, this could absolutely destroy free software.

    Here's the dangerous part:

    (subject to service occupation tax on the value of tangible personal property transferred with the software) [emphasis mine]

    The law is written so that the tax is applied to the value of software transferred - IOW, installing Linux on a client's com

  • ... "custom software". You know, it's software someone customized. As opposed to, say, the software created by God that you go out and pick off a tree.
  • The one thing that jumps out at me is that Blagojevich and his staff have already determined that the custom software tax will net the state $64M in taxes, but my question is what goods will this tax pool come from? The definition is extremely vague, yet there is a hard number being discussed.

    So either Blagojevich pulled this $64M number out of his ass and is wildly guessing, making him a bad politician (oh no! gasp!), or he's already defined the source of the new taxes and the proposal is too vague, mea
  • Let's get this straight. I do custom programming work for a customer. I pay Sales Tax, Corporate Income Tax, and Sales Tax. And even though they are tools/ingrediants for resale, I also pay takes on codec libraries, compilers, and computers.

    Now, as if it's some soft of sin tax (luxury items, copanies that polute, cigarettes) they want to tax us again because ... why?

  • by gozar (39392) on Wednesday May 12, 2004 @07:29AM (#9125453) Homepage
    Read the section:
    The governor estimates a business tax increase of $64 million by eliminating the distinction between canned software sold at retail (subject to sales tax), custom software (subject to service occupation tax on the value of tangible personal property transferred with the software) and software licensed or leased by the developer (currently not taxed).

    The relevant section is that software licensed or leased by the developer will now be taxed. Since Microsoft essentially leases their software under the Software Assurance plan, that means there will now be an extra tax burden on companies using Microsoft products. Microsoft will make sure that doesn't happen, because that will just be one more reason to switch to an OSS solution.

  • What are the implications of this law mixed with the internet? Would I have to pay a tax to Illinois when people from Illinois buy my programs?

    If I do have to pay taxes based on where people buys from, isn't that an incentive to discriminate customers because of where they live?

    Diego Rey

  • Fertilizer tax [wthitv.com], anyone?

    Service tax [awoi.com]?

    Eliminate tax incentives [icpas.org]?

    Trucking registration fee increase [news-gazette.com]?

    The only thing worse than a tax-and-spend Democrat is a don't-tax-and-spend-anyway Republican.
  • I dont get it. When you employ someone, you pay taxes, they pay taxes. The development has already been taxed.

  • With the massive outflow of programming jobs to other countries isnt' the usual policy to tax FORIGN work, makeing the domestic stuff more competitive?

    I'm not even suggesting that much, but this is the REVERSE!
  • by JTFritz (15573) * <jeffreytfritz@gmail. c o m> on Wednesday May 12, 2004 @07:42AM (#9125522) Homepage Journal
    What is custom software?

    Is a spreadsheet that contains data and calculates financial statistics 'custom software'?

    Is a plug-in to a web browser 'custom software'?

    Is an operating system that did not come pre-loaded on a computer 'custom software'?

    Is any software that did not come pre-loaded on my computer 'custom software'?

    Are those free AOL cds that you see everywhere 'custom software'?

    Is TurboTax, the software I use to pay my taxes 'custom software'?

    Is the website that I am running in my basement 'custom software'?

    This legislation is WAY TOO VAGUE to get through... Stand up and make your voices heard Illinois voters!
  • by Alain Williams (2972) <addw@phcomp.co.uk> on Wednesday May 12, 2004 @07:44AM (#9125536) Homepage
    The problem is that the state is running out of money - they propose to fix it by increasing taxes, something that they can do since they are effectivly a monopoly in the geographic area.

    If I have a budget problem, I might try to charge my customers more; but I will probably cut back on what I do or choose cheaper suppliers.

    How much money would the state save if it moved all its office systems from Microsoft to Linux ?
  • by Jonny Royale (62364) on Wednesday May 12, 2004 @07:58AM (#9125626) Homepage Journal
    The point of the article is that the govenor wants to add taxes to LEASED or LISENCED software, as opposed to SOLD software.

    Currently, there are three types of software transfers:

    1. Sale (buy MS Office at CompUSA) - Has a sales tax.
    2. Custom Software (have someone write a program for you) - Has a "service occupation tax"
    3. Lisenced or leased (pay for a licence)- no tax.

    What the govenor is saying is he wants the state to consider, for tax purpouses, the 3rd type of transfer the same as the 1st type, so they get a sales tax for the lisence.

    The Governor's proposal would either repeal the Department of Revenue regulation that distinguishes between a sale and a license of software or create an entirely new tax on revenues from software licensing.
    Empahsis mine.

    Interestingly, if you've ever read a EULA, you never actually BUY software. You usually are buying a licence to install and use the software. Which could, theoretically, have a massive impact on buisnesses in that state, if they had to pay for every license they bought, especially in multi-user buisness environments.

    This [grantthornton.com] PDF file offers a clearer explanation of what the Govenor is proposing (check page 2, 2nd paragraph).
  • It isn't that bad (Score:3, Insightful)

    by Spiked_Three (626260) on Wednesday May 12, 2004 @08:15AM (#9125732)
    It appears to me that all the gov is doing is trying to close some loopholes, not some evil scheme to take over the world as the post and most responses seem to believe. Currently the state taxes retail software (duh), they tax consultants when they write software (duh), but some people are bucking the system and not charging hourly consulting rates, only a license fee, and that is a tax loophole at the moment. So, unless you are against all taxes (and who isnt?) there is really no earth shattering meaning to this proposal.
    Move along, nothing to see here.
    Interesting news must be getting scarce.
  • by jimcooncat (605197) on Wednesday May 12, 2004 @08:46AM (#9125975)
    Maine imposes 5% tax on custom software.

    From Maine Statues, Title 36, Section 1752 - Definitions

    1-E. Custom computer software program. "Custom computer software program" means any computer software that is written or prepared exclusively for a particular customer. "Custom computer software program" does not include a "canned" or prewritten program that is held or exists for a general or repeated sale, lease or license, even if the program was initially developed on a custom basis or for in-house use. An existing prewritten program that has been modified to meet a particular customer's needs is a "custom computer software program" to the extent of the modification, and to the extent that the amount charged for the modification is separately stated.

    ------
    I called the Maine Revenue Service a while back and asked them how they determined the difference between a custom computer program, writing a maintenance script, making an application macro, spreadsheet formula or adding a Windows shortcut to a client's desktop -- at what point does this become taxable?

    They replied: there's no one here that can tell you, and there's no one that will be here that can call you back with the answer.

    So I stopped putting "custom programming" on my invoices, and all labor is now charged as "computer maintenance". IANAL, just a tech guy trying to comply, but there's just no way to.
  • by StoryMan (130421) on Wednesday May 12, 2004 @09:12AM (#9126203)
    Understand the context, though: Illinois has a young, Kennedy-esque governor who claims to be a populist and is working "for the people." He has steadfastly refused to raise general sales taxes or income taxes and is instead turning toward businesses to blanace a 1.7 billion dollar state deficit.

    This governor does not work in the state capital and instead spends all his time in Chicago because "he's got a family to raise, and he can't raise it in Springfield" (or something to that effect). So he spends lots of moola jetting back and forth.

    The theory with Blagojevich is that he's positioning himself for a presidential bid in 2008 and is loathe to contradict his "populist roots" by imposing a tax on the "backs of the hard working men and women of Illinois."

    In a sense, yeah, that's good. I can appreciate that. But the result of his fervent populism is a state government that's only a couple weeks away from a legislative break and is facing enormous pressure within the next two weeks to balance the budget and erase a 1.7 billion -- billion! -- dollar deficit from the state rolls.

    He's in a tough spot, and because he's a union-guy and a guy's guy, Governor Sunshine has backed himself into a corner. The *only* things left are (a) massive taxes on businesses (bad for the state because we have lots of other states close by that would benefit from a business exodus from Illinois) or (b) gambling.

    He's an odd bird, Blagojevich, and he's scraping -- literally, with a little plastic spatula -- the bottom of every barrel across the state to raise money.

    Do I agree with what he's doing?

    I'm not sure. I think Illinois government is in complete *disarray* -- lots of agencies are understaffed, for example -- but so long as he doesn't raise taxes on Ma and Pa, he's cool.

    Welcome to American politics, I guess.

    *shrug*
  • by tigersha (151319) on Wednesday May 12, 2004 @09:17AM (#9126233) Homepage
    So if I write Macro in Excel will that be taxed too??!! And what about my .procmail script which dumps things from some people into a Folder. IS that also taxable? What is "Custom Software"??
  • by Shadowhawk (30195) on Wednesday May 12, 2004 @09:19AM (#9126256)
    Relax!

    I RTFA'd and all it says is that they want to eliminate the difference between custom software (currently hit by a some odd tax which is probably a lower % and may be 0% in some cases) and shring wrap software (which is hit with normal sales tax).

    Also, licensed or leased software (ala software as a service type things becoming common) will also have sales tax (currently is not taxed). I expect that latter change will spread quickly as "software service" business plan becomes more common.
  • by rfc1394 (155777) <Paul@paul-robinson.us> on Wednesday May 12, 2004 @10:10AM (#9126745) Homepage Journal

    If you give something away to someone, whether it's free books at your yard sale or free sample CDs of Linux® at a sales booth at some tech convention, how much sales tax does the recipient owe? Zero.

    If you are running a store and sell someone a CD of Microsoft Windows® you're supposed to charge them sales tax on the $149.95 upgrade price or the $495.00 no previous edition price (or whatever it currently is).

    If you are running a software house and you sell someone a CD of an application which costs $5,000 including customization, some part of that cost is for the software itself and thus should be taxed same as Microsoft Windows (if you believe imposing sales tax on items which are sold is a legitimate action of the government).

    Raising the issue of a 'sales tax' on free items is a red herring here. The issue is whether custom software should be 'sold' for a fee untaxed, while commercial, off the shelf (COTS) software is sold for a fee is subject to sales tax.

    This was an old issue, oh, 20 years ago when I lived in California and had a sales tax permit, and one of the items in the monthly newsletter the Franchise Tax Board sent out was a mention that while labor for customizing software was not subject to sales tax, the base price of software sold was, same as any other commodity. I don't think it's unreasonable to treat the non-labor tax aspect of custom software any different from the non-labor tax aspect of COTS software.

    Paul Robinson <Postmaster@paul.washington.dc.us [mailto]>

  • by AnotherBlackHat (265897) on Wednesday May 12, 2004 @11:18AM (#9127773) Homepage
    ...he is hoping to generate $64 million.


    Taxes do not "generate" money.
    If he wants to make money, he should get a job.

    -- this is not a .sig
  • by pragma_x (644215) on Wednesday May 12, 2004 @12:55PM (#9129394) Journal

    1. Initiate sales tax on custom software: The governor estimates a business tax increase of $64 million by eliminating the distinction between canned software sold at retail (subject to sales tax), custom software (subject to service occupation tax on the value of tangible personal property transferred with the software) and software licensed or leased by the developer (currently not taxed). The Governor's proposal would either repeal the Department of Revenue regulation that distinguishes between a sale and a license of software or create an entirely new tax on revenues from software licensing.


    Here is the aforementioned service occupation tax in Illinois:
    http://www.revenue.state.il.us/LegalInformation/re gs/part140/ [state.il.us]

    A disclaimer: IANACPA (not a CPA).

    After reviewing the tax code mentioned in the article, it seems to me that as long as you're not charging for packaged software or licenses, then you're pretty much in the clear.

    Most contractors I've met, charge labor by the hour to compose, enrich or repair custom software anyway (as a work for hire), at which point you are not exchanging any "tangible property" (or "intangible property" for that matter). They charged labor for something of undetermined value, plain and simple.

    However, if it ever became an issue that you absolutely had to hand your client a pre-packaged solution that needed modifications, then just go open source. Simply charge labor for installation, and enriching the product, but "sell" them the software for what its worth: $0. IMO, I think this could also has the added benefit of side-stepping the (existing) taxcode, since you're performing labor on a product of zero-value (labor performed on a product of value apparently has lots of implications in Part 140).

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