Proposed software tax shortsighted at best
February 28, 2005
BY MICHAEL KRAUSS
The third rail of the
Illinois tech community is Gov. Blagojevich's proposal to tax
certain software purchases made by large companies that are now
exempt from the state sales tax. The governor estimates that closing
this so-called loophole will raise $65 million for CTA and Downstate
is Blagojevich's second attempt to push this tax through the General
Assembly, and his proposal is raising hackles throughout the tech
there are a handful of big corporations who don't pay sales tax
on computer software. Individuals do. And so do the 650,000 small
businesses across Illinois," Blagojevich said in his budget
message earlier this month. The governor's point: You and I buy
software from Best Buy. We pay sales tax. Larger companies lease
their software, avoiding sales tax.
With his colorful rhetoric
favoring the little guy, you might expect Blagojevich to abolish
all taxes on software. Why should the little guy or small businesses
pay? No more taxes on software. We could advertise Illinois as
the tech-friendly state.
Maybe on Mars, but
not in the Land of Lincoln.
tax on an intangible?
There is an argument
for abolishing software sales taxes. Observers see software as
an intangible. We don't charge sales tax on stocks and bonds.
"We defeated it
last year, because legislators realized what the governor is talking
about and the reality are two different things," says Todd
Maisch, vice president, government affairs at the Illinois State
Chamber of Commerce. He says the governor's assessment is inaccurate.
"Businesses do pay tax when they buy software." But
big companies lease the software, not buy it. "We're talking
about a different transaction," says Maisch, who thinks the
governor is levying a new tax. "In Illinois, no leases are
taxed. Why single out corporate software?"
Let's be realistic.
The governor is facing a big budget gap. If we're going to soak
the few big global companies still in Illinois, can't we put the
money toward a technology growth initiative? Can't we take that
$65 million, and establish a venture fund to stimulate new businesses
I want the CTA to have
an operating budget that makes the trains and buses run on time.
But charging a tax on corporate software to fund mass transit
It's not the kind of
bold leadership California voters showed when they approved a
referendum that will provide $3 billion for a venture fund to
make California a global leader in stem cell research.
The governor's software
tax proposal faces impassioned opposition from the Illinois Information
Technology Association, the Illinois State Chamber of Commerce
and the Chicagoland Chamber of Commerce.
tax legislation is dead on arrival," declares Jerry Roper,
president of the Chicagoland Chamber. "Coupling this legislation
to CTA transit funding is not the way to have a predictable revenue
stream for one of the largest systems in the country."
Becky Carroll, spokeswoman
for the governor's budget, says, "There are 45 states in
the nation that have a sales tax. There's only one of those states
that actually has this loophole on the books. It's Illinois. In
no other state in this country with a sales tax does any business
get this break."
Mark Nebergall, president
of the Washington, D.C.-based Software Finance and Tax Executives
Council, which represents the software industry on tax issues,
disagrees. Nebergall claims he's identified "16 states that
exempt software from their sales tax."
Tech leaders like Doug
Cogswell, ITA board chairman and CEO of Downers Grove-based Advizor
Solutions, a business intelligence software company, says Blagojevich's
proposal sends the wrong signal. "They seem to ignore there
is a large, vibrant industry of smaller software companies trying
to grow in this region," he says.
it will, no it won't
Carroll says the software
tax won't affect software startups. Cogswell fears early stage
companies will find fewer large local companies willing to buy
from them because of the tax.
Both sides say the
other's rhetoric is misleading. And I thought Social Security
reform was the third rail of politics.
Krauss is a Chicago area tech writer and consultant.