Washington State Debates Taxing Software Creation

zzyzx writes: "An article in the Seattle PI discusses the existing tax on software creation in Seattle. The law was clarified recently to allow the taxing of the software that was created in Seattle, even if the manufacture of the discs occurred elsewhere. Some Washington state lawmakers are working to overturn these changes. The issue at the heart of the matter: Should an intellectual activity such as programming be taxed in the same way as manufacturing is?"

Comments

is software akin to solid state machinery?

[cisco_rob]

You would tax the manufacture of a whole machine, but not separately tax the solid state boards that did the "thinking" for that machine.. how is software different?

Re:is software akin to solid state machinery?

[ScoLgo]

Or, why not try this...

1. Repeal Federal Income Tax.
2. Institute Federal Sales Tax (say.. 10% - or pick a 'better' number if you like).
3. State sales taxes and income taxes stay in place.
4. No tax on necessities (e.g., food).
5. Tax exemptions for low-income folk.
6. No tax on goods for resale (currently true).

Benefits:

1. I keep the money I make until I decide to spend it on something. Whether I'm an individual, an organization, a corporation, etc. has no bearing. If I spend, I pay tax - period.

2. All this purchasing across state lines to avoid taxes becomes moot. Believe me when I tell you that I do it as much as possible. If I buy a book, a DVD player, a CD, a computer system, whatever, I try to buy out of state to avoid the tax, (I also batch-buy smaller items like books and CD's to cut the freight costs :).

3. The government collects all those dollars that they are whining about missing out on because of internet sales.

4. The IRS can be re-structured to become a collector of sales tax for the fed. No more need for complicated, convoluted tax forms.

Drawbacks:

1. Puts a bunch of accountants, tax lawyers, etc. out of business. (Or at least makes them re-structure their businesses.)

2. ???

Re:is software akin to solid state machinery?

[medcalf]

The only tax that makes sense is income tax. Even sales tax doesn't make sense, let alone all these weird specialized taxes.

OK, you obviously have not thought through taxation very well, if you make this statement. So let's walk through it a bit.

A government (theoretically, anyway) provides services to its citizens. Universally, these include infrastructure development, provision for the common defense, a criminal justice system and so on. Some countries provide more, and some countries have failed, and essentially the government is an armed gang of extortionists. Other than the latter, though, governments generally exist to provide services to their citizens. To do that, a government must have access to resources (people, property, material, etc). To get those resources in a basically free-market system, such as is prevalent in the developed world, requires money, because money is the medium of exchange and because we don't like the government to show up unpredictably with guns to take things from us that the government needs.

This need to raise funds for the government can be met with:

• tarriffs and the like - essentially, money paid to the government to bring goods into the country
• export duties - money paid to the government to be able to send goods out of the country
• sales or value-added taxes - payments to the governnment to sell something or provide a service, based on the market value of the product or service
• user fees - payment for use of a government service, such as admission to a park
• property taxes - payments to the government for services provided for the property (such as keeping foreign armies from seizing the property), based on the value of the property
• income taxes - payments to the government for services that allow you to earn a living, based on the amount you earn (and typically relatively higher if you earn more)

The amount of funds raised depends upon which taxes are imposed, and how much money is behind each source of funds. So let's look at the government's incentive with each tax, the relative amount of funds behind it, and the impact on the society of collecting funds in a certain way.

• tarriffs - The government's motivation is to increase exports and tarriffs, in order to generate more funds. But there is a balance, because excessive tarriffs result in less exports, and thus less funds. As a result, the government will normally keep such a tax low. The increase in exports generates jobs in the economy, and the impact of excessively raising taxes is directly felt by the government in lower revenues. There is no impact on individual liberty, because an individual can avoid the tax by not exporting goods.
• import duties - The government's motivation is to restrict imports (to protect domestic jobs) and to raise tarriffs in order to maximise funds. However, this again is a balanced tax, because excessive import duties make it difficult to bring in necessary goods, and thus cost jobs as well as consumer spending power. There is no impact on individual liberty, because a person can avoid the tax by not importing goods. It is my understanding that the funds raised by current US tarriffs and import duties is sufficient to run a government similar to the one initially created for the US, but sized for the current US. That is, these funds couldn't support an expeditionary army or a welfare state, but could support a defensive army, police force, treasury, Congress, etc.
• sales taxes - The government's motivation is to set the tax as high as possible, to raise maximum revenue. However, people would buy less, causing loss of employment and loss of revenue at the same time. As a result, sales taxes tend to be low. There is no impact on individual liberties, because the tax can be mitigated by buying used goods, less goods or making it yourself (you can grow your own food, build your own house if you have wood or stone on your property, etc).
• user fees - The government's motivation is to set these fees as high as possible, to raise the most funds. However, setting the fees too high will result in people not using optional government services, and thus will decrease revenue. The built-in feedback keeps this tax low. There is no impact on individual liberties because an individual can refuse to use the service, and thus avoid the tax. This is not a big revenue generator, but can be used to pay for government services of real use, like parks, maps, weather data and the like.
• property taxes - The motivation is to set the tax as high as possible to maximize funds. However, doing that causes people to not own property, which reduces the revenue stream. Thus the tax tends to be reasonable. In addition, the US originally made real property ownership a requirement in order to vote, thus providing an offsetting incentive and allowing the property tax to be higher than it otherwise would be. There is a small impact to individual liberties, since the government has to know what property you own and what its value is. However, they don't have to know what you do with or on the property, so the impact is fairly low. This is the main funding method for many states still today.
• income taxes - The government's motivation is to set the tax rate as high as possible without sparking a revolution, in order to maximize funds. Since there is no feedback loop (you have to work to eat, after all), these taxes tend to be very high - particularly so since the higher income earners are disproportionately taxed. (Putting 50% of the taxes on 3% of the voters is not likely to get you kicked out of office.) Further, the government needs to know how much you earn, which is an invasion of your privacy. On top of that, they have to look through your bank account records to prevent cheating, regulate the use and transfer of your money to prevent tax avoidance, and many, many other tyrannies. It is for this reason that direct taxes, except based on head count, were prohibited in the US Constitution: to prevent the govenment from invading every aspect of your life.

In the end, it is the income tax that allows the government to control your life. It is the income tax that makes possible a government of barely-restricted size and power. It is the income tax that allows the government to bribe the majority with money coerced from the minority. It is the income tax which spawns most of the tyranny that the US government practices (admittedly, still less than most places in the world). It is the income tax which sterilizes citizenship by removing the ability of citizens to control their government's behavior by changing their own behavior. It is the income tax which poisons public debate by allowing people to obtain benefits without costs, and thus makes the incentive for an individual to go along with a government program - lest their own government teat be attacked by the beneficiaries of another program - unless they are in the unheard minority who have to fund whatever the latest government program might be. It is the income tax which is LEAST useful and sensible to a free people.

One further point, on bonds: the government can raise money in the short term by taking on debt. This is not a valid long-term means of financing the government, however, because that debt eventually has to be paid back, with interest, thus reducing future funding abilities.

-jeff

Re:is software akin to solid state machinery?

[deepvoid]

Since the government is the entity responsible for manufacturing the money, and the people are the consumers of that money, then why does the government need the money back? Sounds rather inefficient to me.

Taxation is used to govern the rate at which an economy expands and contracts. Too much taxation and the economy contracts, too little and it expands. Rapid expansion creates inflation, while depression lies in the opposite direction. The government does not NEED the tax money, any more than cows NEED hamburgers.

Controlling the money supply is the better way to throttle the economy and has been shown over the last few decades. As a matter of fact, the ultra low interest rates are due to compensation for the ultra high tax rates. If we eliminated tax rates all together, and adjusted the cost of money to a more realistic value, the economy would be a great deal more stable since the primary instability in any ecomomy is fluctuations in taxation.

If you count all of the various direct and indirect taxes you pay in this country, (user fees, windfall taxes, etc) you will find Americans pay a much larger proportion of their income than the pundits will admit.

90% of the time spent in Congressional debate has been related to one tax or another, all on the taxpayers dime. Establishment of a budgetary system proportional to the economy and binding on congress, state, and local gonverments is the best way to go in my veiw.

If the amount of money they receive is directly proportional to economic health and stability of their region, the politians will be more motivated to selecting sound laws and policies as opposed to the parasitic ones they foist on us now.

Well, duh.

[cperciva]

Why should intellectual property be treated any differently than physical property when it comes to tax laws? If businesses are taxed based on their revenue, they should be taxed separately in each jurisdiction based on the value of goods they produce in said jurisdiction.

I'm reminded of the Cola bottling cases, where syrup was manufactured in a low-tax locale and "sold" to bottling companies (wholely-owned subsidiaries). The syrup price was being set in order to ensure that the bottling companies never made a profit, in order that profit would only be reported in the locale where it was almost tax-free. It was ruled that the sale had to take place at market rates -- in other words, you can't hide money from the taxmen by transferring property from one jurisdiction to another. This is exactly the same issue.

Re:Well, duh.

[corey_lawson]

why is IP different? Because IT'S NOT REAL. The physical expression of it is, but the idea behind it is not. The cola bottling cases are no different than a company like Microsoft that for all intents and purposes is a Washington state company, but is incorporated in Delaware, or the deals that companies set up all the time to rig their accounting, or the phone companies claiming that they are justified in treating 3rd party deployers of competing services differently than their own competitive services yet claiming "market rates" (or $800,000 damages for the distribution of a document available from the company for $15.00).

Re:Well, duh.

[GSloop]

Well, Microsoft sure tries!

The (IIRC antitrust) school settlement was valued by MS at over a billion dollars. Never mind that it's cost was very minimal - it was mostly software. MS complained bitterly about having to provide hardware - claiming that providing software was the same value.

I'm not sure I disagree with your point, but it does seem ironic that these same companies who oppose said taxation, use the "valuation" of their products to look good when they give it away, or have their copyright protections infringed.

It's clear that when it's to their advantage to talk about the IP as a real asset with real valuation they do. When the tax man rolls by, they rush out screaming that they couldn't possibly value said IP for tax purposes!

What hypocrites! [Sheesh!]

I do think there are some reasons to tax IP. Since we're moving to a service and knowledge base economy, then the tax laws ought to move to tax the activity. Tying tax law to physical assets rather than IP makes this quite difficult. Lastly, said companies want the government to protect their IP, but not tax it too?

This is a subject I would need to think about more, but I do believe that there would be a fair way to tax IP.

Cheers!

A careful comparison

[Midnight Thunder]

There is a difference between taxing thought and the income made from the result. IMHO, evelopment should not be taxed, but the money made from the sale of the product should. Otherwise the danger is that of reducing development simply because it costs too much to think - programming after all is more about thought than creation.

Heck, why not tax students for going to school!? (Hmm, maybe that is already being done? - that's why we see more money in the detention system than in the edutcation system).

Re:Well, duh. Huh?

[Havokmon]

I don't get it.
Well, your Cola explanation does make sense, maybe I'm thinking too little.

If I'm Amish, and I make furniture, would I be taxed while I'm building the furniture?

R&D is not taxed, ie. Blueprints.
But actual progamming is? The manufacturing process is taxed?

That just doesn't seem right. I don't even have any income until the product is finished and sold, and I've already been taxed on it.

Re:non profit

[FatRatBastard]

I think you've got the wrong end of the stick. It looks like Seattle are trying to levy something that smells awfully like a property type tax, in which case they'll tax you on their percieved value of the software, not on revenue you generate from selling it.

software as service

[Anonymous Coward]

I'll definitely have to look up the law as I'm in Seattle and do some independent development on the side. It seems to me like I don't have much to worry about because this relies on traditional notions of software and selling it. I don't think it takes into account the notion of giving software for free but doing things like selling support for the software or possibly even selling support for the software but bundling it with the "free" software and only selling the bundled version. In a store, this latter idea - free software, charge for support and bundle them together, would seem ridiculous but for software downloads it makes as much sense as companies who charge $30 for their "free" memory upgrades to your new computer. I don't see how this law could be enforced in a systematic way and I question the value of it.

Seattle misuses so much of its funds (mass transit, anyone?) that I guess the politicians are desperate to get more money even though it will certainly hurt its future. Remember a few years ago when every city was boasting about its incentives for software companies and coming up with moronic names like "Tech Alley" to get companies to move there? Now they're apparently trying to get rid of them.

What happened to sales tax?

[loosenut]

The question boils down to whether Seattle should apply the business tax to the development of software -- essentially a thinking process -- as it does to the manufacturing of off-the-shelf software products, software lobbyists say.

"The business tax"? Shouldn't the tax be applied to the business's profits, and be dependent on where the business is headquarted?

If I own ABC Software, and I'm located in Seattle, I can contract programmers in India, and contract a manufacturer in Taiwain, and sell the software all over the world. But the profits are going to be recorded in my ledgers in Seattle, and are therefore subject to any local, state, and national taxes. Am I missing something?

Re:Excellent Idea... If you want to kill your econ

[Belly of the Beast]

We have companies leaving Seattle because the town is wallling down around it it's ears. The roads are a mess. Boeing just moved it's HQ to Chi-town to avoid the trafic. And we all can see the rest of their assembly work following soon. If a city does not keep it's infrastructure up companies can not prosper, or even function. Seattle is sinking for lack of funds.

If a software company has many Seattle employees yet it sell nothing from it's Seattle location then it pays no Sales or B & O taxes (the taxin the article) and Washington has no income tax so why should this software company get a free ride while everyone else has to pick up the cost of roads, fire protection, etc???

Grow-up and stop free loading. We all have a responsability to where we live.

Re: sorry ......

[fferreres]

It is the income tax that allows the government to bribe the majority with money coerced from the minority.

No, it's the sales tax that rapes the masses spending-power so that the goverment can "secure" some companies revenues even when they do not innovate and battle against competition.

People that earn $2000 a month spend something like 95%. People that earn 100.000 a month spend about 30%, the remainder is savings.

This is ok, if you want the USA to be, for example, like Brazil.