March 12, 2002

12:21 PM

Should creation of intellectual propertybe taxable? The City of Seattle wants to tax the development of software, not the sale, the development. Across the country state and local governments are starting to consider taxing this. The question is, is software development taxable? If so, is writing a book taxable, painting a picture? People pay sales tax on the software, and businesses pay income, use, and B&O taxes already. Why is this different? via /.
posted by patrickje (28 comments total)

Man, that's a bad idea.
posted by allaboutgeorge at 12:33 PM on March 12, 2002

How the hell would you devise a taxing schedule for this sort of thing, and how soon would it be before all software development companies in Seattle would move to some other town? And if everyone taxed software development, how soon would it be until there becomes a huge software black-market?
posted by insomnyuk at 12:35 PM on March 12, 2002

More to the point, is making a car taxable? No.
posted by kindall at 12:36 PM on March 12, 2002

This is merely additional proof, if any was needed, that the moment you put someone in a position of authority they immediately become either: A) evil or B) stupid.

...some unusually capable persons may be both evil and stupid...
posted by aramaic at 12:46 PM on March 12, 2002

...some unusually capable persons may be both evil and stupid...

Yeah, and they all end up in fucking Seattle.
posted by Skot at 12:52 PM on March 12, 2002

Seems like they should really call this the "screw Microsoft" tax.
Not that I'm necessarily opposed to that, mind you.
posted by bshort at 1:03 PM on March 12, 2002

bshort:

Considering that Microsoft is in Redmond, not in Seattle, this tax would not effect Microsoft.
posted by patrickje at 1:07 PM on March 12, 2002

You raise an interesting point. :-)
posted by bshort at 1:07 PM on March 12, 2002

this tax makes perfect sense if you actually read the article. seattle taxes manufacturers on the basis of the revenue they bring in from the products that they manufacture in Seattle. For exampe, if Boeing builds an aircraft engine in Seattle and sells it, Seattle taxes Boeing for a small chuck of the profit regardless of where the engine is shipped before it is sold. The Washington legislators are simply saying that the real process of "building" software is not in transfering the code to disks, but in writing the code.

So I guess I'm wondering whether those of you who oppose this bill are opposed to the idea that programers "buid" software in the same way that engineers build engines, or whether you just oppose taxation of companies in general?
posted by boltman at 1:09 PM on March 12, 2002

I can't believe any business still operates in the Pacific Northwest.
posted by UncleFes at 1:24 PM on March 12, 2002

This is how I read the tax law...I will couch it in terms of a your Boeing example.

At Boeing (assuming I don't get laid off), I design the new fancy 797 'behemoth' jumbo jet. I design it on my computer. I then email the plans to the Boeing facility in Chicago. The Chicago plant manufactures the planes, and pays all the taxes, and goes on the sell $10 Billion USD of the plane. Should the Boeing in Seattle pay taxes on the planes manufactured in Chicago?

Or another example, the Associated Press (AP) has a field office in Seattle, one of the reporters writes an article about how many hippies there are in the Fremont district, she mails this article to the New York AP office, after syndication, AP makes about $10,000 USD on the article, does AP owe Seattle any money for the article?
posted by patrickje at 1:25 PM on March 12, 2002

More to the point, is making a car taxable? No.

Actually, this is a very interesting question, and I think it's a little naive to answer with a simple "no". First of all, the plant in which the car is produced will incur a property tax--I imagine the valuation of the property is dependant on the amount of heavy manufacturing equipment in there. In addition, isn't there some sort of value-added or "sales" tax paid upon delivery of the car to the retailer? This tax would be directly related to the value of the product.

Actually, does anyone out there know exactly what sort of taxes manufacturors pay? I know absolutely nothing about the details of this particular issue...

Anyway, the argument for taxing software is a jurisdicational one. As it stands, all manufacturing taxes are paid in the jurisdication where the cds are pressed. But we all know that the actual value of the cd pressing process is just a tiny fraction of the cost of the "manfacture" of the software product. A tax on development allows the jurisdiction in which "manufacture" actually took place to get tax income from the product. That's the logic behind it, I think.
posted by mr_roboto at 1:30 PM on March 12, 2002

mr_roboto has it right. The question here is who has the right to tax the software, not whether it should be taxed at all.
posted by boltman at 1:36 PM on March 12, 2002

boltman: well, it's really less about who has the right to tax it, and more about whether or not Seattle wants to add their own tax to the software.

...after all, it's not like Malaysia (for example) will stop taxing the CD pressing factory.
posted by aramaic at 1:39 PM on March 12, 2002

All of these businesses already pay corporate income tax, withold income tax from their employees, and they pay property taxes (as said before).

Yeah, it would be pretty sweet for everybody (especially the consumer) if we could quadruple tax software makers.
posted by insomnyuk at 1:50 PM on March 12, 2002

I just find it really strange to argue that the CD pressing factories are the people that "make" software.

as far as the point about taxing the engine designer and the journalist--i would think that the city is limited to taxing its own citizens which would bar taxing a newpaper that was based in another state. of course, they'd be free to tax the reporter personally.

and as far as the "quadruple tax" comment goes, we all pay state and federal income tax. does that mean we're all "double taxed"? governments can tax any way they want as long as they don't violate the Constitution.
posted by boltman at 2:04 PM on March 12, 2002

Washington state has no income tax; as a result, both state and local governments are always strapped for cash, and always looking at other bizarre forms of taxes to make up the shortfall. I think that a state income tax would be much fairer than the current structure of sales taxes (8.8% in Seattle) and other unfair redistributions of the tax burden. But of course 80% of the voters in Washington would be against such a tax--they'd rather pay more and not notice it, than notice what they are paying. Behind the usual BS about government's insatiable appetite for taxes, what you really have, in Washington state at least, is a bunch of selfish bastards who are mortally offended at the prospect of paying anything, but equally mortally offended that, in the absence of funding, the roads and the school system are basically shot to hell (not even to mention services for the poor).
posted by Rebis at 2:15 PM on March 12, 2002

...after all, it's not like Malaysia (for example) will stop taxing the CD pressing factory.

Yeah, it would be pretty sweet for everybody (especially the consumer) if we could quadruple tax software makers.

Which is what makes this a situation that is just crying out for a European-style value-added tax. Value-added taxes are much lauded by economists for their market efficiency; one advantage is that they allow for the solution of this sort of jurisdictional dispute. The way it works: at each step of the manufacturing process, you calculate (value of product) - (cost of raw materials) = (value added) and charge some % tax on the value added.

Currrently, the companies are taxed at the pressing plant based on the final value of their software. The bulk of this value is added in development--the actual value of the cd media is minimal. If Seattle were to now add a development tax, the company would be taxed twice on the value of the development. If we were operating in a value-added tax regime however, the companies could claim development as an initial cost in the pressing process, and they would be taxed at pressing based only on the value of the physical media. Seattle could then take its development tax (as value added during the development process) with no redundant taxation.
posted by mr_roboto at 2:20 PM on March 12, 2002

Boltman:

The Wisconsin tax is far more troubling to me than the Seattle tax. The Wisconsin tax levies a 5% tax on custom software development. The effect that this tax will have on Wisconsin consulting firms is chilling. The net effect will be to chase all consulting firms to either Illinois or Minnesota ( I would include Iowa, but I don't think they have computers). The firms would then sell their services to Wisconsin firms. A 5% markup is a big hit.

Pennywise, pound foolish.

Insomnyuk: "Yeah, it would be pretty sweet for everybody (especially the consumer) if we could quadruple tax software makers."
Why would that be sweet? Every company I know is just going to raise their prices enough to cover the tax. The consumer will pay the tax, not the company.
posted by patrickje at 2:24 PM on March 12, 2002

patrickje: i think you missed the invisible sarcasm tags in insomnyuk's post there...
posted by juv3nal at 2:29 PM on March 12, 2002

Yes, it does mean we are double taxed, and I would argue that a direct federal income tax is indeed unconstitutional, to answer your question. (Read Article I, Section 8, which strictly defines how and what the government can tax).

We are more than double taxed, goddamnit, since we are paying property taxes, income taxes, excise taxes, and tariffs (taxes we pay indirectly).

When a business faces a new tax, what does it do? It passes that additional cost on to the consumer, if it can. In a highly competitive market like software, this may be impossible, because the demand for software could be met elsewhere. In this situation, the additional cost of these taxes could put thousands of small companies out of businesss, because competition does not allow them to raise prices. So yes, whenever a government taxes a producer more, the consumer ends up paying more money in the long run.

If I make $40,000 a year in income in Ohio, I pay 30.08% in combined state and federal income taxes, totalling $12,032 in income tax. In Ohio, 44 cents on the cost per gallon of gasoline is added by the state and federal government. Remember, anything that gets shipped becomes more expensive as gas becomes more expensive. There is a 6% sales tax. Then there are municipal property taxes. And excise taxes on goods that I might want to buy, like cigarettes or beer. Or maybe now that the nannies are in power, I'll get to pay tax on 'fattening foods.' And then we have steel tariffs, which will raise the cost of ALL manufactured goods made from steel (cars, washing machines, various and sundry products). Awesome! It's definitely good to arbitrarily raise the cost of living without studying the economic impact.

Behind the usual BS about government's insatiable appetite for taxes

I hope this was a weak attempt at sarcasm. But I guess you believe that people = greedy and selfish, and government = all knowing and benevolent. Remember though, that governments are run by selfish people.

So we have me, Joe Q. Public, with his 27,000 after taxed salary, to cover the rest of the built in taxes of virtually all of the goods I need to buy. Well, it doesn't look like I'll have any money left over to say, donate to charities, or help contribute to a volunteer building fund for a new school library. All the while, our federal government is spending trillions on the most powerful military in the history of the world. Rad! Remember to do your patriotic duty this April 15 and overpay your income taxes, just to be safe.
posted by insomnyuk at 2:31 PM on March 12, 2002

I agree with insomnyuk in the sense that the businesses that are going to be hardest hit by these taxes are the small business, in particular independent contractors. These businesses can ill-afford to raise their prices, especially in todays market. So most will likely eat the tax.

If you read the article, there was a 'Research and Development' credit that businesses could file for to recoup some of the software tax. Good luck trying to get that credit if you are a small business.
posted by patrickje at 2:46 PM on March 12, 2002

I would argue that a direct federal income tax is indeed unconstitutional, to answer your question.

Read the 16th Amendment.
posted by boltman at 2:47 PM on March 12, 2002

The government is there to provide all of the things that it doesn't make sense for private enterprise to provide.

The vast majority of the U.S. budget goes to defense, helping old people, and taking care of people who can't take care of themselves. There's a little thrown in for necessary things like roads and schools and clean water, but those are incidentals.
posted by bshort at 2:50 PM on March 12, 2002

My Prediction: someone will attempt to tax compilers. This will then be followed by an attempt to make free compilers illegal, since they can be used in software development without forcing the user to pay a compiler tax.
posted by aramaic at 2:53 PM on March 12, 2002

there are two arguments going on here: #1 whether gov't should be able to tax production of intellectual property and #2 whether it's a good idea for Seattle to tax software companies.

i have no opinion whatsoever about #2.
posted by boltman at 3:04 PM on March 12, 2002

the idea that programers "build" software in the same way that engineers build engines

To a degree, yes. The programmer spends their day writing a precise description of the program (the source code); the engineer spends their day drafting a precise description of the engine (the CAD file). The difference is that once the programmer has finished their work, "manufacturing" the software is a matter of invoking the compiler and taking a coffee break. Design is everything in software production.

The engine-manufacturing company, by contrast, has only begun when the engineer has finished. Now they must construct a factory, lay on staff, purchase raw materials, ship the materials to the factory, turn the materials into finished engines, and trundle them out the door to the waiting delivery trucks. This process continues as long as they want to create more engines. Software has nothing like this; once the software is designed, that's more or less all there is to do.

I imagine that this tax on manufacturing was created not to tax manufacturing specifically, but to tax large business in general, at a time when large industry implied manufacturing. The assumption is no longer valid, and in order to continue levying business taxes they must extend the definition of "manufacturing" to cover the activity that several of Seattle's (and King County's) largest companies now derive their revenue from.

aramaic:

haha. Very funny. No sir, this isn't a compiler I'm using here. Not at all, no. It's merely an astonishingly sophisticated regular expression text-replacement engine...

-Mars
posted by Mars Saxman at 3:14 PM on March 12, 2002

This all sounds like a bloody good economic argument for companies developing software to relocate out of Seattle, or wherever this kind of tax is applied.
posted by walrus at 7:39 AM on March 14, 2002