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Illinois Considers Taxing Custom Software

Posted by timothy on from the starring-nobuko-miyamoto dept.

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?

4 of 369 comments (clear)

  1. Re:The free/Free software by cygnusx · · Score: 5, Informative

    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.

  2. Re:The free/Free software by Ctrl-Z · · Score: 5, Informative

    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.
  3. A "small" explanation of the article by Jonny+Royale · · Score: 5, Informative
    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).
  4. Re:The free/Free software by rsmah · · Score: 5, Informative
    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