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

Right now they get a tax break

[drodver]

Research and Development time is tax deductable.

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?

[Deagol]

No, it doesn't. Unlike income tax, which is (distortedly) proportional to your earnings, sales tax is a flat rate.

So, the $6.50 in tax for a $100 trip to buy clothes hurts the mother of 3 earning $5.75/hr a lot more than the well-off geek earning $35/hr.

Now do you understand? Sales tax only makes sense for bloated local governments, and not the people who are taxed.

Why get taxed twice (or more) on everything you purchase? Ever look at a utility bill? Consumers are routinely screwed by taxes for utilities.

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.

So how much do they charge...

[MarkusH]

For 'Hello World'?

non profit

[Kizzle]

Does this apply to non profit stuff like open source?

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.

In other news....

[bobdehnhardt]

The entire fleet of Bekins moving vans was last seen converging on Redmond, WA. A company spokesman reported that they had received "one hellacious moving order" from an undisclosed client. This report came on the heels of a sudden dip in the housing market in and around Seattle, as home prices fell 73%, while listings increased 800%....

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.

[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!

Re:Well, duh.

[GSloop]

The city did provide a decent location for the company to have it's offices. It had to provide schools police, etc.

You may argue that these costs are covered some other way, and I might even agree with you, but the city does provide many things for the company.

Companies (and the rest of us) want it both ways. Provide me a great place to live - no pollution, friendly people, good schools, open space, parks, recreation, low crime, chicks in thongs (oops I digress) and I don't want to pay.

These things cost money. Someone has to pay. If you live there, or have a business there, you should have to pay too.

I think this idea, though it may not be a good one is a way to help allocate costs to those that are there, even if they find a way to shift the monetary activity elsewhere.

Cheers!

Re:Well, duh.

[FatRatBastard]

Well, Microsoft sure tries!

True, as do a lot of other companies. I remember Sun getting into a lot of stick because they claimed that Kevin Mitnick cost them "billions" (or maybe it was lots of millions). IIRC The IRS came sniffing around, basically saying "Oh really? Why haven't you reported these 'billions'?" I think Sun quickly retracted their statements.

As for taxes, property taxes are a really squishy area. It depends all on how the gov't decides to assess your "property." Of course, they're the ones assessing and collecting, so it always smacks of a conflict of interest. I say stick to taxing the things that require no guesswork. Tax monitary transactions (sales taxes) and income if you have to tax. Maybe property in terms of real estate. But that's about it. IP is a very, very, very vague thing that would lead to a lot of abuse (both by the gov't and large corperations trying to dodge it).

The gov't here in VA is already values my car more than the market would should I sell it now (and taxes me accordingly), I don't want some gov't accountant telling me that the software my company creates is worth $X (for very large values of X) and tax me annually on it (above and beyond the sales taxes, income taxes, SS taxes, etc that we already pay)

Tax bar napkins

[slickwillie]

They could just add a tax on cocktail napkins, sort of like the tax on recordable media. After all, isn't most good intellectual property created on the back of a napkin, in a bar, just before last call?

No big deal

[r_j_prahad]

If they're proposing a tax on innovation, I don't think Microsoft has anything to worry about.

Keep your lies consistent

[4/3PI*R^3]

Quote 1:Microsoft says Commercial software pays taxes
Quote 2:...Microsoft Corp., are pushing for an amendment to a municipal tax-reform bill to block the taxation of such intellectual property.

Microsoft's talking out of both sides of their mouth again.
Nothing new!!!!

Re:Keep your lies consistent

[FatRatBastard]

Not at all... MS are claiming that they *already* pay taxes, and that this is above and beyond taxation already in place.

I have to agree with Microsoft on this one. This is one bad law.

Should Authors be taxed by the gov't for the gov't's perceived value of an Author's work? If a book is out of print and no longer being sold, should the gov't have the right to continue to tax the author simply because the gov't feels that IP has value?

If I create a GPL'ed program, retain the copyright to it many folks the world over find it to be an incredibly useful bit of code (one that helps lots of companies save money / generate revenue) should I (as the owner of the IP) be taxed year after year because the gov't determines that bit of code has value?

Of course it should

[sam_handelman]

A software company makes use of community services - Fire Departments, Public Transportation and so forth. It should pay to support them, just like any other business should support the infrastructure of the economy in which it operates.

Software companies may be more or less subject to the various pressures imposed by such taxation on other forms of manufacturing activity - including the tendency to move their operations overseas. However, software shouldn't be any-more-exempt for these reasons than any other business.

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.

For everyone without a...

[talks_to_birds]

...modest knowledge of basic American geography, but with a quick opinion as to what this all means:

Micro$oft is based in Redmond, WA -- which is not, I repeat, not, Seattle, WA

(Thank god...)

Who's in Seattle?

umm..

I think Real (Audio..) is, and Adobe is still...

t_t_b

Sauce for the gander

[coyote-san]

What's that old saying - what's good enough for the goose is good enough for the gander? (That's gander - male goose - not gandolf, you goof!)

If they want to claim Intellectual Property is the equal of Real Property in terms of legal protections, etc., then they should carry the same tax burdens. Property tax, creation tax, whatever. It's time for that corporate free ride to end.

My only concern is that a poorly-written law that targets predatory monopolies could also affect sites that just provide Linux or BSD mirrors (if there's a tax fee per download), or worse would cover the "lone wolf programmer" who just wants to write a better widget for some OSS application.

More generally, there's the issue of whether other services are also taxed. I know some states charge sales tax on *everything* - including the hourly charge for the car mechanic and plumber, for the lawyer, etc. Again, this law should be fair - only tax programmer time if lawyers and accountants are also taxed. Only tax volunteer services if other volunteer services are taxed.

But on this particular issue, if the producer gets as pissed off at you sharing a copy of their software as they would if you set up a family picnic on their campus headquarters, then the IP and RP should either both be taxed or neither be taxed.

Hello, Morons:

[Rick the Red]

To the morons here in /. who think this affects Microsoft: Microsoft is located in Redmond, not Seattle. The only effect on Microsoft would be rising real estate prices on the eastside as Seattle's high-tech firms (Adobe and Watchguard come to mind) relocate.

To the morons in Seattle who thought this was a good idea: That sucking sound you hear is hundreds of high-tech businesses leaving your city.

Re:Hello, Morons:

[Perdo]

All of Washington state, not just Seattle. Other states tax oil revenues, Washington should tax it's prime industry too. As it stands, Microsoft pays NO taxes to any agency and in fact graciously waives the 1 billion dollar a year tax refund owed to them by the IRS because of our fucked up tax laws. Tax the unholy crap out of them, they pay no dividends or taxes. Money NEVER leaves Microsoft.

Re:Excellent news

[Rick the Red]

Exactly how does taxing commercial software hurt open source? This law, if it sticks, would have the exact opposite affect, if any.

You obviously don't understand Washington's B&O taxes. It's a tax on income (not profit). If you're writing open source and not charging for it, there's no income to tax.

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?

Excellent Idea... If you want to kill your economy

[DaedalusLogic]

That's a great move for Seattle! That will curb and eventually inspire negative growth in a huge sector of your local economy. A classic case of biting the hand that feeds you. OK, so that was sarcastic... but maybe that means that tech jobs will get spread around a little. Software development is one industry where the only resource you truly need is smart people. Unlike the chemical industry where you need things like cheap water and power, or auto industry with good transportation infrastructure. A good software company can equally exist in towns like Chattanooga, TN as it can in Seattle. Tax the software developers... they may not move right away due to large capital investments. However, they won't ever build a new investment in that community.

MS isn't affected

[Hooya]

...because they're talking about taxing software that's 'created' in seattle/Washington. As we all know, some (if not all) software in windows was written elsewhere (BSD?, CPM, OS/2 etc..) so this tax doesn't apply to them!

This could very well change if they extend the tax to include innovation. oh, I forgot, we're talking about MS.

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: short version

[fferreres]

My short version I:

- A high sales tax can kill your economy
- A high income tax can only slow it down

My short version II:

- A high sales tax kills all high-volume low-margin bussiness
- A high income tax can only cut profits

My short version III:
- Look at Argentina's economy, which is collapsed due to 21% VAT + 3% gross sales tax (income tax doesn't matter when you don't have profits).

Companies do not pay taxes, YOU do.

[serutan]

Does anybody really still not understand this? Companies do not PAY taxes, they COLLECT taxes. Business tax of any kind is just another expense that has to be built into the price of the product. Any legislator whose version of tax relief for us peasants is to tax those big old evil corporations is lying, plain and simple.

If we completely did away with all corporate taxation and replaced it with a national sales tax, properly calculated, the net cost of living would be the same. The differende would be that we would KNOW how much tax we were paying. Congress wouldn't like that at all. Educated citizens (oops, sorry, I meant "consumers") are the last thing they want.