‘Rentals’ and sales tax
p2pnet Feature:- Software publishers insist we don’t buy their products. Rather, we merely license them.
So why do we have to pay property or sales tax as if they were normal purchases?
And how should businesses calculate their capital expenses, depreciation, etc, on assets they presumably don’t actually own?
Excellent questions, says Ed Foster, referring to responses to an earlier Griplelog post on First Sale and software.
Read on >>>>>>>>>>>>>>>>>>>>>>>>
Paying Taxes on Software
By Ed Foster – The Gripelog
“If the software is licensed, then the originating company owns it and they can pay the property taxes on it,” wrote one reader. “I have to pay property tax on all the computer hardware and software used in my business virtually forever or until I declare it obsolete and no longer used. This is subject to audit by an agent of the county whose audit is accepted by the IRS as valid. If I rent a car as a business expense, the property taxes are paid by the owner, not me, except as incidental through my rental payments. It would serve these software developer thugs right to have to pay property tax on every sale they make to every end user in every state. If they refuse, then the software is automatically recognized as owned by the buyer, not leased.”
Several readers also theorized that, if you’re not truly buying the software, you shouldn’t have to pay sales tax. “If you do not pay sales tax to lease or rent a car, and you do not pay sales or property tax when you lease or rent an apartment or house, but you do pay sales tax when you purchase software, then it really must be sold, not licensed,” wrote another reader. “After all, when you license the use of a car or house, you do not pay taxes for that transaction. Companies see software costs as a capital cost. If you don’t own it, it cannot be capital.”
Readers have previously speculated about depreciation and software. “The idea of depreciation is that if you for example sell a piece of software after using it for two years, it still has some value to somebody, though less value than it did to you when you originally purchased it,” one reader wrote. “It’s not about making a gain on the sale, but about recovering some of the original purchase price since you didn’t completely use it up — a gain on the sale is in fact treated as a capital gain. The whole notion of applying depreciation to software may be broken since software doesn’t “wear out”, except in the eyes of software vendors who want us to buy their latest upgrades. But those are the rules we have to play by.”
Another persistent issue is how to treat embedded software from hardware vendors like Cisco who say it must be re-licensed if the device is re-sold. “So how do the bean counters handle the depreciation of hardware/software that has almost zero resale the day after purchase, since the software re-license costs more than a new unit?” wondered one reader. “In the dot.com failures, what did it take to purchase all or substantially all of the capital stock of the bankrupt transferor? If the debts exceed the assets, it doesn’t seem to take much. I don’t know the answer, but it’s an interesting problem.”
It does seem like software publishers are getting to have their cake and eat it too. “I have managed large software development projects during which we leased computer hardware and development software,” wrote one reader. “Some items were purchased. It was part of the lease agreement and monthly payment amount to specify which party, the owner or the lessor, had the rights to declare tax liability. In most cases, the owner claimed that right because it was to their bottom line advantage. Those leased components were expensed as a project cost and were not recognized as capital equipment of the company. The stuff we bought, whether hardware or software, became capital expenses which were depreciated differently, depending on whether it was hardware or software. Those are IRS and GAAP rules and practices.”
But that same reader suggests that perhaps there is an easy way to force software companies to play by just one set of rules. “Why are we attempting to fight this so hard?” the reader wrote. “Let the software companies win. Just let them win the entire battle and the war. When the states, counties, and municipalities come raining down on them to squeeze money from their coffers, it will be in sufficient amount to force this back into the courts to be undone by the same stupid judges that created this mess in the first place. This license/ownership issue is totally absurd in that we allow the software suppliers to get away with it.”
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September 30th, 2005 at 7:49 pm
In those states that do not recognize constitutional property rights on “personal property” by taxing it, let’s report some of these software companies to the authorities for not paying the property taxes on the software they own. I am willing to bet if 10 percent of the population in Virginia, Maryland, and Connecticut reported Microsoft for not paying the property tax on the $199 software on their computers, it would raise a big stink!
Fortunately Florida (as a state) realizes that people actually own their personal property (such as furniture, computers, etc) and does not make people pay a yearly rent (”propery tax”) on these items. Therefore, I cannot report Microsoft in my state. However those people who live in states that do force people to pay personal property taxes should report Microsoft for not reporting and paying taxes on all the software that they own.
September 30th, 2005 at 8:09 pm
Each individual state has different laws regarding what is subject to ’sales tax’. When examined in the aggregate, they are completely inconsistent and vexacious. This is principally one of the reasons why one isn’t charged sales tax if you order something through the mail or on the internet from a vendor in another state which does not manifest a presence within the state you reside. Every vendor would then have to have approximately 43 (there are 7 or 8 states that do not have sales tax) different sets of rules for computing sales tax.
For example, in Massachusetts, the general rule is “If you can eat it or wear it, it’s not taxable.” However, there is a separate ‘Meals Tax’ for food that is prepared and served to you in restaurant or is prepared so that it’s ready to eat. Thus if you buy a sandwich, you pay tax. If you buy a roll, some cold cuts, and some condiments, there is no tax.
Some things have strange special rules. ‘Sweet’ baked goods, such as donuts, sticky buns, cannolis, tarts, etc are not subject to tax if you purchase 6 or more of them. I suppose the theory is that one is not going to eat 6 donuts (the local constabulary notwithstanding) at once as a snack and that you are bringing them elsewhere to consume.
Newspaper and periodicals that are published at least 4 times a year and on a ‘regular, on-going basis’ are not subject to sales tax, while any kind of books are except for Bibles, textbooks acquired by an accredited educational institution (public or private, religious or not), and books they may be provided that are incidental to the purchase of a service, where is price charged for the service vastly exceed the value of a book. (Services ranging from accounts, lawyers, and doctors to dry cleaners, barbers, and landscapers are not subject to tax. Repair services are not subject to sales tax, but any parts used to accomplish such repairs are.)
There is no sales tax on clothing, EXCEPT if the item is sold for more than $175.00, then tax is due on the amount over $175.00. This exempted amount has not been updated since the 1960s, at which time it was considered that any clothing that cost more than that would be a ‘luxury’ item. Certain ‘luxury’ fabrics (mainly furs) have tax due on the entire amount of sale. However, there is a great deal of confusion as to whether leather is or is not within this category. General retailers will not charge the tax, while specialty retailers will charge the tax, unless you make such a fuss to the point of threating to withdraw the transaction.
Sales tax IS charged on rental vehicles, along with several other surcharges, fees, and directed purpose taxes. ‘Room tax’ is charged on ‘temporary lodging’ such as hotel and motel rooms if the price is over $15 per night for up to 90 consecutive days. Tax is not due if any kind of lease is executed, thus firms offereing ‘corporate furnished apartments’ aren’t subject to the tax as they require a lease to be signed, even if for just one night. Typically, the minimum is one weekl for such arrangements though.
In regard to software, any retail consumer ‘purchase’ of software is subject to sales tax on the theory that you are walking out of the store with a box containing media and perhaps manuals. The tax treatment of a business’s acquisitions of software depends on the specifics of transaction and the end purpose of the software. In general, if it’s a ’subscription’ there is no tax on the actual software, but there is tax due on manuals and media that are purchased as a separte component of the subscription. If the software is to become a component of something that will subsequently be sold in a taxable transaction, no tax is due. If the software is to become part of a system to be sold to a government entity, no tax is due.
Religious and certain non-profit (403b) organizations can get a blanket sales tax exemption certificate.
Finally, if you do have something delivered from out of state or drive to New Hampshire (no sales tax there) and purchase something, you are theoretically required to pay ‘use tax’ on it at the same rate as the sales tax to the extent of the difference between the current tax rate and what might have been paid at the location where the item was acquired. If you paid a 4% tax on something, then you own 1% (current rate is 5%.) In reality, this is rarely enforced against individuals except in egregious cases.
Sales and ‘use tax’ are lumped together to some extent, which is how the Mass Dept of Revenue justifies levying tax on software that is ‘licensed’.
While it’s an interesting idea to challenge the application of a ’sales’ tax to something you aren’t really purchasing, it might well be the case that it looks like sales tax, has the same rate, etc, but it simply goes by another name in the law books.
In other states, like Florida, it’s much simpler. They levy sales tax on EVERYTHING (so it seems), primarily because an income tax is constitutionally prohibited and none of the policians dares even suggest that an income tax be considered.
–TG
October 3rd, 2005 at 3:43 pm
Food (non-prepared and non snack) is not taxed in Florida.