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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?
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I doubt this could ever go through, since the definition of 'custom software' is too vague. Would this tax me if i installed a copy of ms office with custom options? What about 3rd party plugins (paid for by me, or free)? What about rolling my own linux kernel? Or even making my own distro. And as for little programmer shops that would ultimately feel the heat, does this mean that when they package up their software and put it up on a shelf it's no longer "Custom software"? Bad idea, bad definition, bad enforceability, bad tax revenue idea.
Will wank off Linus Torvalds for fame.
Not too hard to figure out - pay $10 million for a custom system in Chicago, or pay $9.5 million for the same system in Gary, Indiana.
Yay! Just what the world needs, more archane, archaic taxation systems that mean that you have to employ people just so you can be sure that the government is taking the right amount of money from you.
And if you pay too much - forget it, you'll never see that money again. If you pay too little, they'll take you to court and add huge fines.
You can't win, you can't break even, and you can't even quit the damn game.
'Don't worry' said the trees when they saw the axe coming, 'The handle is one of us.'
The relevant section reads:
1. Initiate sales tax on custom software: The governor estimates a business tax increase of $64 million by eliminating the distinction between canned software sold at retail (subject to sales tax), custom software (subject to service occupation tax on the value of tangible personal property transferred with the software) and software licensed or leased by the developer (currently not taxed). The Governor's proposal would either repeal the Department of Revenue regulation that distinguishes between a sale and a license of software or create an entirely new tax on revenues from software licensing.
If I were a company director, the first reaction would be to see if open source software exists to do the same job, and if it were cheaper to hire/contract to write inhouse software. Looks like this would hurt contractors/small companies than anything else.
Who will define it? The lawmakers and their sponsors. Once the law is in place, lawyers and judges will have their pop at anything which isn't 100% crystal clear.
Mhhh... watercraft float on water, witches float on water. Therefore watercraft must be witches!
Can we burn them?
Now today, we get his quick fix plan to tax custom software! And I'm sure we'd all agree this is much better than a casino in Chicago, right? Right??
Bah! Me no like politicians.
Taft
...and who gets to define it?
The 'custom software' loophole has been around for years. For basics, any software which required substantial modification or creation was seen as good for programmer's jobs and as an extra expense to business, so it was given this loophole.
In short, Gov. Blag*&%$ is raising the cost of employing programmers in Illinois and making outsourcing much more profitable. Hope you didn't vote for the idiot.
So long and thanks for all the fish . . . !!!
What exactly does "software" mean and who gets to define it? If I send someone an 8 line javascript as an email attachment how much is the tax on that? How about taxing other forms of written communication; emails, webboards and snailmail letters. Why stop there, you could tax vocal communication too with discounts for non words and gurgling noises. I thought patents were an unofficial tax on software anyway?
Freedumb of speech is here, tax the planet.
Writing software is a service. So is legal work, plumbing, lawn mowing, ... If they're going to tax custom software, then _all_ services should be taxed.
Well the trick is to find a Programmer who will do all this custom software development for free? Custom Software development usually always paid. Because with "Free" Custom Software development, first you will need to find a programmer willing to do it for free, which will be hard because a lot of custom software development is usually quite boring and the programmer will not get much credit outside the company that is using it. But say you did find someone to develop it for you for free the next trick is keeping them motivated to get it done,"its free so they can take as long as they want its not hurting them any", plus if the person is doing it for free then they probably have a paying job or are in school, the slim possibility of being independently wealthy. But in most cases the job will be worked on part time at best. So by the time the application gets done it will be a long time. and probably a lot of loss productivity.
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.
If something is so important that you feel the need to post it on the internet... It probably isn't that important.
Most countries that have a sales tax also have a tax on services. In Europe its called VAT and in Oz/NZ its called General Sales Tax (GST). If they start this, I expect it won't be long before every service is taxed just like current sales tax which sort of makes sense in a service economey. Of course the better solution would be get better value for our tax money.
Also most Custom Software doesn't bother with any sort of licensing
That's because it's the very definition of a work for hire - the programmer is hired specifically to create that work on behalf of their employer. At the end of it, I think everyone would expect to own what they had paid to be created.
It's official. Most of you are morons.
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.
And this would be called free trade? Just like the free trade in steel, lumber, etc that the US repects?
Even setting aside the hypocrisy of preaching free trade then not practicing it, your custom duty may be impractical: you're forgetting that a great deal of software code written in India is written by programmers employed by American companies, so how you'd levy a custom duty on, say, a product that was coded by Indian employees of a company based in California would be interesting.
"Accept that some days you are the pigeon, and some days you are the statue." - David Brent, Wernham Hogg
The relevant section is that software licensed or leased by the developer will now be taxed. Since Microsoft essentially leases their software under the Software Assurance plan, that means there will now be an extra tax burden on companies using Microsoft products. Microsoft will make sure that doesn't happen, because that will just be one more reason to switch to an OSS solution.
What, me worry?
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.
Sounds typical for the Midwestern states.
There are still a significant number of politicians that want to see the information economy go away. Indiana is even worse in this regard. They have put tons of money in a dumb attempt to bring manufacturing jobs back and they leave in little things that give companies that could make real cash and create decent jobs major headaches.
If you are going to give out corporate welfare, at least give it out to people that could actually HELP you... jeesh.
Why don't you embrace your slashbotness instead of living in a dreamworld?
The problem is that the state is running out of money - they propose to fix it by increasing taxes, something that they can do since they are effectivly a monopoly in the geographic area.
If I have a budget problem, I might try to charge my customers more; but I will probably cut back on what I do or choose cheaper suppliers.
How much money would the state save if it moved all its office systems from Microsoft to Linux ?
"he is hoping to generate $64 million"
Generate?
There is no "generate" about it. I think the phrase he's searching for is: "hoping to take $64 million"
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.
It appears to me that all the gov is doing is trying to close some loopholes, not some evil scheme to take over the world as the post and most responses seem to believe. Currently the state taxes retail software (duh), they tax consultants when they write software (duh), but some people are bucking the system and not charging hourly consulting rates, only a license fee, and that is a tax loophole at the moment. So, unless you are against all taxes (and who isnt?) there is really no earth shattering meaning to this proposal.
Move along, nothing to see here.
Interesting news must be getting scarce.
slashdot troll = you make a compelling argument I do not like the implications of.
I've copyrighted a few programs about 10 years ago, so I believe that was the case at least then. I believe that notice was listed on the actual forms to submitting for the copyright.
Now if you DON'T get paid for the work, then the AUTHOR maintains the copyright regardless of who uses it and for what purpose -- again unless expressly transferred otherwise (to another party, public domain, etc).
SPAM solution made easy: 1 spammer, 5 cords of rope, 5 hourses, and fireworks. Be creative.
Maine imposes 5% tax on custom software.
From Maine Statues, Title 36, Section 1752 - Definitions
1-E. Custom computer software program. "Custom computer software program" means any computer software that is written or prepared exclusively for a particular customer. "Custom computer software program" does not include a "canned" or prewritten program that is held or exists for a general or repeated sale, lease or license, even if the program was initially developed on a custom basis or for in-house use. An existing prewritten program that has been modified to meet a particular customer's needs is a "custom computer software program" to the extent of the modification, and to the extent that the amount charged for the modification is separately stated.
------
I called the Maine Revenue Service a while back and asked them how they determined the difference between a custom computer program, writing a maintenance script, making an application macro, spreadsheet formula or adding a Windows shortcut to a client's desktop -- at what point does this become taxable?
They replied: there's no one here that can tell you, and there's no one that will be here that can call you back with the answer.
So I stopped putting "custom programming" on my invoices, and all labor is now charged as "computer maintenance". IANAL, just a tech guy trying to comply, but there's just no way to.
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
Understand the context, though: Illinois has a young, Kennedy-esque governor who claims to be a populist and is working "for the people." He has steadfastly refused to raise general sales taxes or income taxes and is instead turning toward businesses to blanace a 1.7 billion dollar state deficit.
This governor does not work in the state capital and instead spends all his time in Chicago because "he's got a family to raise, and he can't raise it in Springfield" (or something to that effect). So he spends lots of moola jetting back and forth.
The theory with Blagojevich is that he's positioning himself for a presidential bid in 2008 and is loathe to contradict his "populist roots" by imposing a tax on the "backs of the hard working men and women of Illinois."
In a sense, yeah, that's good. I can appreciate that. But the result of his fervent populism is a state government that's only a couple weeks away from a legislative break and is facing enormous pressure within the next two weeks to balance the budget and erase a 1.7 billion -- billion! -- dollar deficit from the state rolls.
He's in a tough spot, and because he's a union-guy and a guy's guy, Governor Sunshine has backed himself into a corner. The *only* things left are (a) massive taxes on businesses (bad for the state because we have lots of other states close by that would benefit from a business exodus from Illinois) or (b) gambling.
He's an odd bird, Blagojevich, and he's scraping -- literally, with a little plastic spatula -- the bottom of every barrel across the state to raise money.
Do I agree with what he's doing?
I'm not sure. I think Illinois government is in complete *disarray* -- lots of agencies are understaffed, for example -- but so long as he doesn't raise taxes on Ma and Pa, he's cool.
Welcome to American politics, I guess.
*shrug*
So if I write Macro in Excel will that be taxed too??!! And what about my .procmail script which dumps things from some people into a Folder. IS that also taxable? What is "Custom Software"??
The dangers of excessive individualism are nothing compared to the oppressiveness of excessive collectivism
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.