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 mass transit.

This is Blagojevich's second attempt to push this tax through the General Assembly, and his proposal is raising hackles throughout the tech community.

"In Illinois, 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.

A 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 and jobs?

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 lacks vision.

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.

"The software 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.

Yes 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.

Michael Krauss is a Chicago area tech writer and consultant.

 

 ©2005 Marion Consulting Partners