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?

Comments

Re:The free/Free software

[cygnusx]

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.

Re:The free/Free software

[Afty0r]

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.

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

[Ctrl-Z]

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.

A "small" explanation of the article

[Jonny Royale]

The point of the article is that the govenor wants to add taxes to LEASED or LISENCED software, as opposed to SOLD software.

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.

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.

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).

Re:The free/Free software

[Dr. Evil]

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:Yeah right.

[Jaywalk]

the definition of 'custom software' is too vague

But that's not what the article says. While the header says they're going to tax "custom software" the article says that the issue is really licensed software. He's trying to erase the distinction between software that is sold and that which is licensed and is proposing to tax the licensing fees. There is currently no tax on licensing fees.

Re:The free/Free software

[rsmah]

This is not completely incorrect. There are basically three categories:

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