Confusion Swirls Around Business-Software Tax
Friday, April 01, 2011
Confusion swirls around business-software tax
Denver Business Journal - by Ed Sealover Date: Friday, April 1, 2011, 4:00am MDT
Colorado’s tech-trade advocates are organizing to say the state’s months-old tax on most business software purchases has hurt job growth and should be stopped.
Software purchased by download used to be exempt from Colorado’s 2.9 percent sales-and-use tax. The state Legislature removed the exemption last year as it curtailed business incentives to help fill budget shortfalls.
But how the tax applies to various purchases and use of software remains unclear. That murkiness is hurting Colorado’s reputation and causing some companies to hold off adding jobs here, said Su Hawk, president of CSIA, a technology trade group.
"We want to go back to clarity,” she said. "Businesses have a very complex environment to work in, and Colorado can’t afford to have a tax that’s giving us a reputation of being unfriendly to business.”
The legislation last year extended state sales and use taxes to downloaded, noncustom software. The tax previously applied only to packaged software bought in stores or preloaded in hardware.
GOP leaders are preparing to submit legislation in early April to reinstate a software sales tax exemption.
SolutionStream LLC is watching to see whether that passes.
The Lehi, Utah, company stopped a Denver expansion that it hoped would double the size of its business after it factored in the software tax.
"We’ve put everything on pause,” said Chad Atkinson, SolutionStream managing partner.
The company employs about 100 people and develops custom software for businesses around Salt Lake City. It planned to open a 50- to 75-employee satellite office in downtown Denver this year, he said.
He didn’t expect, based on Colorado’s reputation and what he’d heard from potential clients, that Colorado’s tax code could raise problems for his business. Now the company is holding off leasing office space until it sees how the debate about the software tax repeal plays out.
SolutionStream’s custom software largely wouldn’t be taxable by the state, but the company is unsure what tax liability it might face for the tens of thousands of dollars in software tools it buys each year, or what Colorado may decide is taxable in the future, he said.
"Colorado’s not an option for us anymore, and not just because we don’t know what our tax bill would be, but because we don’t know what [the Legislature] would do next,” Atkinson said.
Larger software makers who sell broadly, such as Denver-based Quark, say they’re used to factoring in different sales and use taxes on their sales.
But Hawk and supporters of software tax say there’s lots of confusion about how to apply use taxes to software bought for use in other industries.
Where the software physically resides — which may be on computer servers out of state — and how much it’s used by in-state employees all factor into the equation, said Bill Mueldener, an accountant with Hein & Associates LLP in Denver, and a critic of the software tax.
He’s had clients in oil and gas drilling struggling to place a state tax value on the software its employees use in the field in Colorado one day, and Wyoming or somewhere else the next. Similarly, some banks are wrestling with whether the online banking systems they buy are taxable or not, he said.
"Software is such a different, intangible animal,” said Mueldener, and there’s been little interpretation help from the state.
Mark Couch, spokesman for the Colorado Department of Revenue, doesn’t buy the complaints.
The legislation last year removed a 2006 exemption for custom and downloaded software — known as Special Regulation 7 (SR 7) — that was written into the state’s tax code. Companies, prior to SR 7’s repeal, sought $15 million in reimbursements from the state to get back sales taxes they’d paid by mistake on software purchases.
"They had no problem figuring it out when it was a refund they could file for,” Couch said.
Since SR 7’s repeal took effect midway through 2010, software tax changes resulted in nearly $2.8 million in new revenue to the state, the Department of Revenue estimates.
But the department isn’t sure about the figure because it doesn’t know exactly what businesses have bought when they submit sales-and-use taxes to the state. The state calculated the software tax total based on year-over-year change in remittances by companies in industries most likely to sell software.
But, CSIA says, the state’s estimates include taxes paid on in-store sales of packaged software as well as the software preloaded on computers hardware — both of which always have been taxed. Thus, Colorado overstates the revenue being received as a result of last year’s rule changes.
The likelihood the state is getting even less and benefiting so little from the software tax, makes a stronger case for its repeal, Hawk said.
"It’s not worth the cost of all this confusion and the damage to our state’s reputation,” she said.