Sadly, the Washington state House of Representatives is close to passing legislation that would apply the state sales tax (currently 6.5%) to professional “custom software” and “customization of prewritten software” services. This goes far beyond just us “geeks;” any company in Washington that uses software customization services (e.g. hires someone to design or tweak their website, their student record system, their electronic medical records, etc.) will now have to pay sales tax for those services.
Here are the two scenarios that HB 3191 inflicts on all Washington companies that hire contractors for their software-related needs:
Scenario 1. If they hire an in-state consultant or consulting company, the in-state consultant or consulting company will have to collect the sales tax and pay it to the state.
Scenario 2. If they hire an out-of-state consultant, they will have to pay use tax (paid in lieu of sales tax) on their next tax bill. Again, ANY company in Washington will suddenly have to pay at least 6.5% more for these services.
Damaging the long-term health of our state economy is not an acceptable solution for remedying short term problems. In order for Washington’s economy to thrive, our businesses, especially small and medium-sized businesses, need the support from our elected officials.
The Washington Technology Industry Association (WTIA) has been lobbying hard to delete this provision since it came up last Monday. As members of Washington’s high-tech community, all of us here at Übermind would like to express our adamant opposition to the proposed House Bill 3191, Part 15 (starts on page 90), again, which proposes to apply sales tax to “custom software” and “customization of prewritten software.”
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
Not only is House Bill 3191 bad for all consumers of custom software services, it is also highly out of line with the positions of all the other 49 states. Although we are not tax attorneys here at Übermind, our research was unable to find any state currently charging sales tax on custom software services.
Thanks again for taking the time to read this important information. If you share our belief that this legislation would be damaging to the people of the great state of Washington, then we and the WTIA humbly ask that you please contact your state Representative and state Senator today to express your opposition to taxing custom software programming services.
In addition, please pass the message on to the sponsors of this bill: Representative Hunter (hunter.ross@leg.wa.gov) and Speaker of the House Frank Chopp (chopp.frank@leg.wa.gov).
Here’s hoping that we Übies won’t have to move to Oregon!
Tags: custom software tax, House Bill 3191, software development, software development tax, Washington State