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Illinois Considers Taxing Custom Software
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?
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.
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.
It is not uncommon for companies to sell custom software but retain intellectual property rights to that software. Chances are that if one client requires a solution, then there are others out there with the same needs.
www.timcoleman.com is a total waste of your time. Never go there.
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.
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 PDF file offers a clearer explanation of what the Govenor is proposing (check page 2, 2nd paragraph).
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.
===== Murphy's Law is recursive. =====
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
well for starters, you need to look at the actual amount of money being brought in. They are actually talking about an extremely small amount of money. 50 something million dollars spread around isnt that much - so maybe this is a tax not on the software but on the SALE of the software? Could someone confirm that I am correct? In large transactions for custom installations, you have to tax the consulting time, but not the actual product its self right? While I dont agree with ANY taxes to begin with, this isnt as terrible and awefull as everyone is making it out to be - its just another tax. If you dont want them, dont vote donk ;)
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>
The lessons of history teach us - if they teach us anything - that nobody learns the lessons that history teaches us.