CSIA Bellyflops with Anti Tax Push HB 10-1192

Did you hear that you could be taxed more?  We should oppose it without actually knowing what it is.  GET YOUR PITCHFORKS READY, NO TAXES COLORADO HB 10-1192.

Well, that is what CSIA has been saying for a few weeks.  What is this tax?

They don’t say.

Well, it is a tax on software sold online, and they have been going around to tech events and meetups spreading fear about thousands of job losses and massive taxes.

All this never naming what the tax will actually be.

That makes me feel, well, a bit, well, lied to. When a party purposefully withholds data, I feel like there is something more to the story.

So I actually read the bill that CSIA never links to, because, well, linking to the bill will show how much of a non issue this might just be.  You should just be scared and contact them so they have more people in their membership emails (or so it feels, at the Boulder New Tech Meetup they asked people to not contact their representatives, but email them, and they will pass it on).

The HB 10-1192 bill is here (.pdf).

It says that the current tax on packaged software can be extended to software sold online from a Colorado business to a Colorado resident (please correct me if I am wrong).  11 states currently have laws like this (via CSIA).

“TANGIBLE PERSONAL PROPERTY” INCLUDES STANDARDIZED SOFTWARE, INCLUDING BUT NOT LIMITED TO ELECTRONIC, TELEPHONIC, OR SIMILAR TRANSFERS OF SUCH SOFTWARE OR SUCH SOFTWARE DOWNLOADED FROM THE INTERNET OR DELIVERED TO THE PURCHASER BY USE OF TANGIBLE STORAGE MEDIA WHERE THE TANGIBLE STORAGE MEDIA  IS NOT PHYSICALLY TRANSFERRED TO THE PURCHASER. THE DEPARTMENT OF REVENUE MAY PROMULGATE RULES FOR APPORTIONING TAX IN THOSE INSTANCES IN WHICH STANDARDIZED SOFTWARE IS TRANSFERRED FOR USE IN MORE THAN ONE STATE.

I’m no lawyer, but I don’t see a single % in the bill.

So it is an unnamed tax % on software that is currently taxed if you buy it in a store.

The sky is falling.  We should all panic and freak out.

CSIA told us to.

It isn’t like all our biggest software companies are incorporated in Delaware anyway. See Cameron’s comment below. I was wrong.

I could be way off, please correct me if I’m wrong.

Some interesting commentary on a different bill HB 10-1193 here, which would tax affiliates making companies like Overstock and Amazon subject to state tax (or them not paying affiliates).  This seems like a much bigger thing to worry about.

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  • http://www.revenews.com/ Angel Djambazov

    Hi Andrew,

    Thanks for referencing the ReveNews post. I think the potential loss of ad revenue from Overstock and possibly Amazon to Colorado publishers (website owners, bloggers, etc) really makes HB 1193 short sighted.

    You asked on Twitter about the CSIA freakout over HB 1192. Here are the comments I shared with you:

    CSIA tends to overly call out that the sky is falling, but that bill really is poorly written. The question is will the bill put put commerce of software in CO and CO developers at a competitive disadvantage? Maybe. But realistically it also isn't well defined on how it will deal with things like:

    -How will DRM be taken into account especially on a subscription basis?
    -What constitutes possession? Does it occur before or after a demo? How will the state track that or audit that? h
    -How does it impact legal consumer to consumer sharing?
    - Why do they carve out an exception for “newspaper media” but include “software media”

    And that's just scratching the surface. I am sure a lawyer could come up with some really scary scenarios.

    Like we agreed on Twitter, CSIA tends to overly call out that the sky is falling, but that HB 1192 really is poorly written.

    Always a pleasure discussing with you.

  • http://twitter.com/ccamrobertson Cameron_R

    Agreed regarding the CSIA position on this – I think that this is a great way for them to get their name out and overcharge a lot of new members for useless lobbying.

    However, my understanding regarding any and all sales taxes is that they apply to all firms that have operations in a given state – thus, even though many startups are Deleware corps, they still must pay Colorado sales taxes if they sell product to Coloradans and have a physical presence (office, agent) in Colorado. Don't know whether or not this is the case regarding this law, but I have yet to see much clarity on the details.

    My biggest concern would be the added bureaucracy of having to collect and report sales taxes. I suspect that many people would pony up the extra bucks for a service that they enjoy. The fixed costs in time for a small startup having to do this seem to be far higher than preexisting concerns such as filing quarterly tax returns or renewing a business license.

    I do agree that any added transactions costs to running a business (i.e. tax collection and reporting) will result in a lower number of businesses created. But, of course, the murkiness of all of this really doesn't hint at what those transactions costs would be.

  • andrewhyde

    Thanks, great points, updated the post.

  • Randy Bouquet

    Did you take a look at the very last section?

    [quot]SECTION 4. Safety clause. The general assembly hereby finds, determines, and declares that this act is necessary for the immediate preservation of the public peace, health, and safety.[quot]

    Seriously? The public's peace, health and safety is at risk if downloaded software is not taxed?

    Ok, now that I have that out of my system. As a consultant specializing in customizing Microsoft's SharePoint software, this IS damaging. The state government is writing a blank check (because there is no %) they can cash anytime I write code for one customer and use it again at another customer. “Downloading” really has nothing to do with it. They would, in affect, be taxing my services of writing software because of code reuse.

    I am not a lawyer and very well might be missing something, so please let me know if I am.

    If I am not, the software consulting industry in Colorado could be significantly impacted by this legislation.

  • andrewhyde

    That last statement is how they are proposing the tax, to get around TABOR.

    If the state can't hire cops, then yes, the public's peace and safety is at risk.

    Can you name the 10 states that this takes place in? I have not talked to someone that can name one, which leads me to believe it is just another part on the tax form.

  • Nikki Mill

    Andrew, thanks so much sharing your opinion on this important issue. Let me answer your questions and clarify a few things: 1) HB1192 and a video of the testimonies from Wednesday’s Finance Committee vote have been available on the CSIA website as of Friday, January 29th. 2) You’re right; we should have had the bill up sooner. 3) By contacting your legislators through a SaaS service we purchased for the industry, you are NOT added to our newsletters, unless you chose to be. 4) In regards to other states that have laws similar software sales taxes, – Only Connecticut, Delaware, Hawaii, Massachusetts, Mississippi, Nebraska, New Mexico, South Dakota, Tennessee, Texas and West Virginia would have comparable high sales taxes for the software industry and for software purchasers. California and Texas are the only two states with successful tech industries, but they also have other state initiatives (and very established tech communities with highly successful companies or large industries), so Colorado would then be relegated to the lower 12 states in the United States with a tech-unfriendly environment.

    We very much want people to understand that this is a complex issue and there are many unintended consequences, which nobody has had enough time to think through. Part of the problem is that they are rushing this bill (and others) at an accelerated pace though the legislative sessions. The Legislative sessions started on the 20th of January and by March 1st, if all 11 tax bills go through, Colorado could have 11 new tax laws on the books! You are absolutely right about the importance of HB1193 as well; however, we had so much work to do on HB1192, it wasn’t possible to be aggressive with both. We chose HB1192 because we believed it would have the most impact on Colorado companies and employees.

    HB1192 doesn’t just affect the software companies who will have to collect and remit the sales tax. To Cameron’s point, they might have to hire legal and accounting services earlier in their company’s life cycle than anticipated. This bill is not just a sales tax, but a use tax. What this means is the way this regulation is written, companies across industries could be required to inventory all software being used by all of their employees who work in Colorado or come into Colorado for a temporary timeframe. If the original purchase of software was not subject to tax, the employer could be responsible for submitting use for all of the software being used by its current full-time or part-time employees in Colorado. Even if the employee only works in Colorado one day, the employer would be responsible for submitting the use tax. Meaning each user of a license/application/saas/etc. would need to also pay a tax. All this just adds to the complexity of this bill; a bill that could be made into law in one just one quick week. So, please pardon our urgency on this important tax bill.

  • MrPete

    Nikki highlights some of the challenges here.

    The bottom line issue here is the same as with patents: it's one thing to tax (in this case) or provide legal protection (in the case of patents) for a tangible “thing” that one can see, touch, etc. But when you try to tax or protect an INtangible product, that doesn't really exist in a single place at a single time… everything gets not only complicated but incomprehensible and illogical.

    That's why the supreme court recently restored the traditional definition of patent, to only apply to tangible things. No more software patents.

    This whole intangible sales and use tax thing gets crazy pretty quickly.

    If I (being based in Colorado) have a website (in New Mexico) that links to a downloadable AntiVirus subscription service (whose headquarters is in California but the servers are in Texas)…and a guy who lives in Australia purchases a subscription for use on his laptop which he uses for his volunteer work in Malaysia… which governments get to charge sales tax on that subscription, how do they split it up, and who is supposed to fill out the paperwork? (That's a REAL scenario, although I'm not certain of all the locations… yet another challenge with this sort of thing!)

  • jeff mathews

    Insightful!

    This has got me thinking. Local and state tax just won't make sense in the future. We need everything to move up a rung. We'll have Federal and World Taxes.

  • MrPete

    Or… everything needs to move DOWN a rung. People on the other side of the nation…or the world… or Denver for that matter… have no clue about what is needed here.
    Insightful book: You Are Not A Gadget… shows the fallacies of the current move toward “hive” or “noosphere” mentality…. a big topic that will be discussed in the years to come…

  • jeff mathews

    Insightful!

    This has got me thinking. Local and state tax just won't make sense in the future. We need everything to move up a rung. We'll have Federal and World Taxes.

  • MrPete

    Or… everything needs to move DOWN a rung. People on the other side of the nation…or the world… or Denver for that matter… have no clue about what is needed here.
    Insightful book: You Are Not A Gadget… shows the fallacies of the current move toward “hive” or “noosphere” mentality…. a big topic that will be discussed in the years to come…

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