Illinois Considers Taxing Custom Software 369
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?
Value, but no charge? (Score:3, Informative)
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
Re:Oh joy (Score:3, Informative)
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.
Re:The free/Free software (Score:5, Informative)
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.
Re:Article text (Score:2, Informative)
(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 business) - $64.0 million
Eliminate luxury watercraft use tax loophole - $7.0 million
(page 406)
Sales Tax Loophole Closings
. . .
Collect sales tax on canned software - $64.0 million
Close the loophole that allows a business to purchase multiple copies of a computer program without being subject to sales tax on the licensing fee, while an individual who purchases a single copy of the software is taxed on the software purchase.
Re:The free/Free software (Score:5, Informative)
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.
Re:The free/Free software (Score:5, Informative)
Sorry, you're wrong. But nice try. (Score:4, Informative)
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.
A "small" explanation of the article (Score:5, Informative)
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.
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).
Re:The free/Free software (Score:5, Informative)
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.
Re:The third bullet in the article (Score:2, Informative)
Legally, any good that is sold, whether it be the first time or resale is subject to state sales tax.
Cars are easy for the state to keep track of. When you go to register a new (to you) vehicle, the DMV makes you pay the tax before you can continue. It's a little bit harder for them to send a tax inspector to every yard sale and flea market. They know when to choose their battles.
From a cube-mate who recently bought a boat: Watercraft are also taxed in this manner (here in VA).
Re:S/W development will just move from Illinois (Score:2, Informative)
Re:Yeah right. (Score:5, Informative)
Re:The free/Free software (Score:5, Informative)
1. You are an employee (i.e. paid under W-2). In this case, the copyright on all works created by you for your employer belongs to the employer.
2. You are a contractor (i.e. paid under 1099) and the contract explicitly states the work you do is "WORK FOR HIRE". In this case, the copyright again belongs to the client.
3. You are a contractor and the contract does NOT state the work is "work for hire". In this case, the copyright stays with you. It doesn't matter that the client paid you or not. I think there is case law that states the client is at least entitled to a de-facto license to use the work in question but I'm not sure about that.
Cheers,
Rob
Re:Software tax? (Score:3, Informative)
Now, I wonder if our governor will keep taking expensive flights between Springfield and Chicago every weekend at taxpayers' expense if he expects Joe Sixpack to charge and pay taxes when he sells his bass boat?
Re:Yeah right. (Score:3, Informative)
Is sales tax tacked onto the bill, when you lease a car?
what's "custom" ised software? (Score:2, Informative)
rhetorical question. If you follow around US federal reserve notes,from the second they are poof created, they are all tax dollars already, ie, it's all been taxed into government ownership previously. If you are dealing in FRNs, none of it is your property. None, zero. It's all the governments (well, a private banks paper), and they let you use some of it. And being legal debt instruments, they start out as a debt, and you get paid with a debt,you attempt to pay off a debt by transferring another debt, and so on. They retax their own debt, and so on.
Sound incredibly stupid? Why yes,yes it is, it is an extremely stupid way to create "money" for anyone productive, but it's a superscam con for the people who start it and have people faked out into using it. It's fat city for the other guys. Using future debt as a medium of exchange instead of having money represent produced-wealth is lame to begin with, but it sure is handy for government and some rich banks.
aaack, another time...It's such an overwhelming and successful con....
Anyway, without seeing how the law is worded it's hard to tell,I'm only looking at the article, but seems like it's so open ended and vague that it would rapidly rise (most likely) to beyond this 64 million dollars with the application of normal bureaucratic greed. Then come the lawyers and the courts and the judges and the lawsuits,typical government crap.
You know, the soviet union collapsed when their economy was so much black market and grey market and government bloat that it eclipsed the above board official "white market". It had as much to do with that as anything reagan did with military one upsmanship. Our government now is doing it's level best to force everyone into being a criminal it appears, doing it's level best to make the economy so incredibly lamer complex with regulations and scams that they think up that's it's almost impossible to deal with it. I wonder if they really understand what will eventually happen, if it's intentional, or if they are truly that incredibly stupid.
This doesnt mean what you think it means... (Score:3, Informative)
Re:The free/Free software - wrong! (Score:2, Informative)
Sorry, but you've got things backwords in this case.
In Canada, intellectual property remains in the hands of the person who created it, unless a contract exists which specifically transfers it, or if the creator is an "employee" of the company.
So if I was contracted to develop a site for a client, and the IP issue was not discussed in the contact, then the copyright stays with me. This would restrict the business from changing or altering my code/design or giving it away to someone else.
One interesting copyright law which is in Canada (and most of the rest of the world) but not in the US is the idea of 'Moral Rights'. Unless waived, moral rights prevent a new copyright holder from altering the created work in a method which would distort, mutilate, or otherwise prejudice the honour or reputation of the author. It isn't in the US mainly because the entertainment industry wanted to use copyrighted ideas in hollywoodized movies ;-)
Links to back me up!
-
Rod Apeldoorn
It's no different than any other sale (Score:4, Informative)
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]>
Re:Yeah right. (Score:3, Informative)
But it's not a purchase. Permission to use IP within license terms is not a sale. You cannot put restrictions upon the use of something you buy (First Sale Doctrine). It's a contract (albeit, a flimsy one... a Shrinkwrap Agreement).
Really not so bad for contractors. (Score:3, Informative)
Here is the aforementioned service occupation tax in Illinois:
http://www.revenue.state.il.us/LegalInformation/r
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).