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?
Comment removed (Score:5, Funny)
Re:The free/Free software (Score:5, Insightful)
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.
Re:The free/Free software (Score:5, Insightful)
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.
Re:The free/Free software (Score:5, Informative)
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: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)
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 free/Free software (Score:3, Funny)
I've copyrighted a few programs about 10 years ago, so I believe that was the case at least then. I believe that notice was listed on the actual forms
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:The free/Free software (Score:3, Funny)
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)
Re:Yeah right. (Score:3, Insightful)
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)
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)
Re:Yeah right. (Score:5, Insightful)
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)
Is sales tax tacked onto the bill, when you lease a car?
Re:Yeah right. (Score:3, Interesting)
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)
hint: yes, you do.
'nuff said.
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).
Re:Yeah right. (Score:3, Insightful)
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)
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)
S/W development will just move from Illinois (Score:3, Insightful)
Re:S/W development will just move from Illinois (Score:3, Insightful)
Or $1,000,000 from Bangalore
What exactly does "custom" mean... (Score:3, Interesting)
Re:What exactly does "custom" mean... (Score:5, Insightful)
Re:What exactly does "custom" mean... (Score:5, Interesting)
The 'custom software' loophole has been around for years. For basics, any software which required substantial modification or creation was seen as good for programmer's jobs and as an extra expense to business, so it was given this loophole.
In short, Gov. Blag*&%$ is raising the cost of employing programmers in Illinois and making outsourcing much more profitable. Hope you didn't vote for the idiot.
Re:What exactly does "custom" mean... (Score:3, Insightful)
Freedumb of speech is here, tax the planet.
Re:What exactly does "custom" mean... (Score:5, Insightful)
Generate?
There is no "generate" about it. I think the phrase he's searching for is: "hoping to take $64 million"
this one is easy (Score:2, Interesting)
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
Oh joy (Score:5, Insightful)
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.
Re:Oh joy (Score:2)
Re:Oh joy (Score:3, Insightful)
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)
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.
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.
Tax (Score:2)
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)
Huh? (Score:2)
Could anyone more knowledgeable about law explain the implications of this?
Hrmm (Score:2)
Article text (Score:5, Insightful)
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)
(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)
Re:Article text (Score:3, Interesting)
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?
Stupid is as stupid does (Score:3, Insightful)
Welcome India (Score:2, Troll)
Re:Welcome India (Score:3, Insightful)
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?
Headline a little misleading (Score:2)
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,
Re:Headline a little misleading (Score:2)
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
ie: canned software and software licensed by the developer would be treated equally and therefore sub
Re:Headline a little misleading (Score:2)
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.
Not as bad as some proposals... taxing open-source (Score:3, Interesting)
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.
Absolute nightmare... (Score:2)
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
This just in... (Score:2)
Consider other proposals first? (Score:5, Interesting)
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
I have an idea. (Score:2)
why not tax everything? (Score:3, Insightful)
Aren't they taxed? (Score:2)
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.
Re:why not tax everything? (Score:2)
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.
Technology does not make a good tax stream (Score:2)
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
Bye bye Illinois software industry (Score:3, Interesting)
Easy way out... (Score:3, Interesting)
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?
Re:Easy way out... (Score:2)
So the service tax begins (Score:5, Insightful)
Tech Support (Score:3, Interesting)
corporate-only activity? (Score:2)
should I put on my tinfoil hat now?
I don't write custom software. (Score:2)
Re:I don't write custom software. (Score:3, Insightful)
This is ridiculous... (Score:2, Insightful)
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
Isn't All Software... (Score:2)
Where are the dollar figures coming from? (Score:2)
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
They need another tax? (Score:2)
Now, as if it's some soft of sin tax (luxury items, copanies that polute, cigarettes) they want to tax us again because
Microsoft will make sure this doesn't happen (Score:4, Interesting)
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.
Internet (Score:2)
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
Other taxes: (Score:2)
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.
Double taxation (Score:2)
Outsourcing (Score:2)
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!
Custom Software Definition... (Score:3, Insightful)
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!
the ailing state budget (Score:4, Insightful)
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 ?
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).
It isn't that bad (Score:3, Insightful)
Move along, nothing to see here.
Interesting news must be getting scarce.
Maine Sales tax on custom software (Score:5, Interesting)
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.
Understand the context (Score:5, Insightful)
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*
What about a spreadsheet (Score:5, Insightful)
This just makes custom and shrink wrap the same! (Score:3, Interesting)
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.
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]>
Taxes don't generate money. (Score:3, Funny)
Taxes do not "generate" money.
If he wants to make money, he should get a job.
-- this is not a
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).
Re:The third bullet in the article (Score:3, Funny)
Can we burn them?
Re:The third bullet in the article (Score:2, Funny)
Re:The third bullet in the article (Score:2, Funny)
Re:The third bullet in the article (Score:2)
Re:The third bullet in the article (Score:3, Insightful)
This is not a good thing if this resolution passes due to the cascade effect this may have on other "resellable" items.
Re:The third bullet in the article (Score:2)
Talk of "double taxation" is bogus; all money is taxed many, many times as it makes its way around the economy. Tax policy should be about "fair," not buzzwords. In my opinion, if you have the disposable income to buy a boat, used or not, you should pay tax.
Re:How about custom duty on software from India? (Score:5, Interesting)
Even setting aside the hypocrisy of preaching free trade then not practicing it, your custom duty may be impractical: you're forgetting that a great deal of software code written in India is written by programmers employed by American companies, so how you'd levy a custom duty on, say, a product that was coded by Indian employees of a company based in California would be interesting.
Re:How about custom duty on software from India? (Score:3, Insightful)
And if those Indian programmers were developing that software on servers physically located in California, it would be much more difficult to figure customs duty...
Re:How about custom duty on software from India? (Score:2)
However, duty is traditionally charged as a percentage of the cost of the item, now to what does that give considerable advantage, I wonder......
So althou
Re:How about custom duty on software from India? (Score:3, Insightful)
The whole issue of taxing "Custom Software" makes the assumption that it is untaxed. It is quite taxed so long as it is made in the USA. The Labor of the Employees makes it's cost nearly 70% tax.
The whole issue on a duty on software from anywhere else has to do with the disparity of the tax situations. To be most brief the Citizens of the USA are consigned by Congress to pay pretty high taxes. The purposes for these taxes include care of the elderly, national armed forces, various national purposes, an
Re:Ohio already taxes custom software (Score:4, Insightful)
There are still a significant number of politicians that want to see the information economy go away. Indiana is even worse in this regard. They have put tons of money in a dumb attempt to bring manufacturing jobs back and they leave in little things that give companies that could make real cash and create decent jobs major headaches.
If you are going to give out corporate welfare, at least give it out to people that could actually HELP you... jeesh.
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?
This doesnt mean what you think it means... (Score:3, Informative)
Eats, Shoots, and Leaves (Score:3, Funny)
Uhhh. where does the comma go in the parent's title?