HB3191 - Custom Software tax

Almost every developer I know has at one time or another worked on side contracts relating to "custom software". Provisions in HB 3191 would require that state sales tax (currently at 6.5%) now be added on.

This provision came to my attention through some discussion on our local Bellingham Linux Users Group mailing list with several people responding that this would hurt their small business as well as one suggesting that they might consider leaving the state.

The Ubermind blog also has a good posting on how this custom software tax will do much more harm than good. Specifically they mention the following great points:

To be abundantly clear, any company in Washington will suddenly have to pay at least 6.5% more for custom software services. Here are a few of the important points that surround this thoughtless bill:

“Professional Service,” not “Retail Sales” – custom software is a professional service no different than the services rendered by attorneys, engineers, management consultants and other similar professions; reclassifying custom software to a “retail service” is simply not logical

Increases an Already Heavy Tax Burden – requiring custom software companies to charge their customers state sales tax will increase the costs and taxes for all types of Washington businesses

Increases Offshoring – large customers of custom software companies will seek to avoid cost increases from state sales tax by using offshore providers, which will lead to job loss among Washington’s custom software providers

Businesses Will Leave – custom software providers may decide to relocate their offices to a neighboring state to avoid the burden of collecting sales tax revenue for the state

Headache for Consumers – companies that use out-of-state custom software providers will be burdened by use tax, which must be paid in lieu of state sales tax that out-of-state providers do not charge

Endless Ambiguity – the Dept. of Revenue and taxpayers will find themselves looped into endless discussions and arguments over tax liability; for example, should a web design firm be considered a “custom software” provider?

Poor Classification – unlike sellers of “digital goods” (e.g. MP3’s from Amazon), the majority of custom software providers are not set up to receive payments from clients via credit card; implementing new e-commerce systems allowing sales tax collection will, again, be burdensome and costly.

Make sure you contact your local representatives and let them know what you think about the custom software tax provisions in HB 3191.