HB 1192 Passed - Colorado Software Tax

I have debated a bit about a proper response to Senator Mary Hodge after she replied to my email urging her to vote against HB 1192 -otherwise known as the Colorado software tax bill. The little kid in me wants to respond with very juvenile taunts and thumbing my nose at her whereas the “responsible” adult in me knows that this doesn’t solve anything. HB 1192 is a recent bill that was fast-tracked through the House & the Senate and pertains to the taxation of software and specifically, removing tax exemption status on software -downloaded software in particular. You can find it here.

Colorado is one of the lushest tech hubs in the country, in my opinion, with our darling Boulder being something of the epicenter between all of the many companies that have relocated their HQ’s here over the last decade and the tremendous amount of startup activity. I’ve been fortunate enough to be involved with a small handful of Denver startups over the last five years, including my own financially-unsuccessful production company. Startups -whether they are technology-oriented or otherwise- are insane environments to work in and you have to genuinely believe in your product or service to give so much of yourself to them. Regardless, startups encourage innovation and spark something magical for those involved with them -whether it be the actual builders or the simply the end users. Our global culture is currently in transition -moving from the tangible (e.g. print products) to the intangible (i.e. digital)- and with the digital age comes a phenomenon where we simultaneously decrease our sense of distance between countries, cultures, and civilizations and yet also decrease actual physical, in-person contact. Technology, social media, and all of the drama that is attached to these things is here to stay -these are not fads that will simply go away if we ignore them long enough. Because of this, many heavy hitters in the tech industry hear spoke out about it.

My own schtick? You want to remove tax exemptions to balance the budget? Fine. Find someone that knows how to write bill properly. Why not be specific instead of leaving the bill as vague as possible so that you can exploit the loopholes in the future? While I don’t think the prospect of taxing software is earth-shattering, I have no tolerance for intentional generalization within legal actions that will affect so many. Everyone uses software. You use it to type up your documents, to make presentations, to post your what you’re eating for breakfast on your Twitter feed. Below I have posted Senator Hodge’s personal email back to me from two days ago. Even in the email, she is not specific. She has found a way to appear specific without going into many details. My biggest problem with this? Neither the bill nor Senator Hodge state how much this tax percentage will be -not to mention the addition of tax percentages of cities & counties leveled on top of it. (CSIA touches upon this briefly, but has not posted sources for any of their information.

Thank you for taking the time to write me.

I appreciate your interest in balancing Colorado’s budget. The current
recession has created a shortfall of $1.5 billion in the state’s
roughly $8 billion budget. As you may know, in our efforts to balance
the budget over the last 12 months more than 75% of the savings has
come from cuts to existing services including the Departments of
Education, Higher Education, Corrections, Health and Human Services.
We have had to close schools, release prisoners early, and close some
of the state’s only remaining mental health facilities.  Even after
all these cuts we have still not done enough to fill the hole in the
budget.

We must have a fair and evenhanded approach to keeping the budget
balanced.   As one step toward this goal, we passed 9 bills that will
end or suspend some tax exemptions and save the state $130 million.
House Bill 1192, which eliminates certain software exemptions, is one
of those bills.

HB 1192 removed a tax exemption on the sale of certain software.  Some
confusion existed around the kinds of software this would affect. To
clarify, there are four major categories of software:
1.      Off-the-shelf software that you buy in a store: Customers currently
pay sales tax on those items (such as Microsoft windows) and will
continue to pay sales tax under this bill.
2.      Purely customized software:  If a software company such as Oracle
designs a software program uniquely for a business, the purchase of
that software does not currently include sales tax and will not
include sales tax under this bill.
3.      Software built by a business for internal use:  For example, if a
law firm’s IT department wants to build software for its own employees
to monitor billable hours, that software is not taxable now and will
not be taxable under this bill.
4.      Modified off-the-shelf software (MOTS): This type of software is a
combination of off-the-shelf and modified software.  In other sectors
of our tax code, an item that is partially taxable and partially tax
exempt is assumed to be wholly taxable, but previous to this
legislation, MOTS was entirely exempt. (This exemption was never
passed by the state legislature; it was put in place by an 11th hour
executive order by Governor Owens before he left office.) Under the
new bill only the part of the software that is off-the-shelf will be
taxable; the value of the modifications done to this software or the
ongoing support provided for the use of this software will not be
taxed.  Finally, software that is purchased off the shelf but is
delivered to you in the form of a download rather than a store
purchase was not previously taxed.  This bill creates a consistent
standard for all purchases of the off-the-shelf software so that they
are eligible for sales tax regardless of how they are delivered.
Currently, 11 other states have similar taxes on software sales, and
many, like Texas and Massachusetts, are viewed as the nation’s leading
centers for software development.  Moreover, Colorado is ranked as the
4th best state in the country to do business based on its very
favorable tax climate.  We know some of the reasons we have been able
to attract and grow so many software companies in Colorado include the
fact that we have a wonderful quality of life, we offer outstanding
research institutions as partners, and we provide strong public
services to make this state so livable.  In order to preserve the
climate that has attracted and grown these businesses, we must make
sure we can provide the core public services of education, health
care, and corrections – the major reasons people move and stay in
Colorado.  We are confident that our pro-business tax climate combined
with a very strong culture of software and technology industries in
Colorado will continue to keep us a national leader in the software
industry.

As you know, the state has already made dramatic cuts to public
services, including a proposed 260 million dollar cut to K-12
education, an 18% cut to agriculture and a 12% cut from health care.
As one step toward balancing our budget, we decided to look at the
more than 2 billion dollars of tax exemptions that the state of
Colorado currently gives to businesses.  The bills we passed today
will remove around 4% of the total amount of tax exemptions that
businesses currently enjoy in Colorado, a smaller percentage than
almost all of the public sector cuts.  We believe this package of
bills is part of a fiscally responsible approach that will share the
burden, protect public safety, and prevent us from making still deeper
cuts to public services that would force us to fire public school
teachers, pull funding for college students or stop payments to
Medicaid patients.

Thank you for input.  Please let me know if there is anything more I can do.

Sincerely,

Mary Hodge