Today, the House Finance Committee passed HB 3191, a 153 page bill that requires sales tax on custom software development.  This is a major departure for what has been considered a professional service and taxed accordingly.

It is now up to those in the technology community to express opposition to the imposition of sales tax on custom software development.  Please contact your legislator today to say “no” to taxing custom software development.  You can find your legislator here:  http://apps.leg.wa.gov/DistrictFinder/Default.aspx

In addition to contacting your state Representative and state Senator, please e-mail Representative Hunter and Speaker of the House Frank Chopp.  They can be reached at hunter.ross@leg.wa.gov and chopp.frank@leg.wa.gov, respectively.

Background

Under current law, “prewritten” software and “custom” software are taxed differently.  Prewritten software, whether downloaded or bought off the shelf is classified as a retail sale, subject to sales tax, whether you are a business or a consumer.  Sellers of prewritten software are considered “retailers” and pay B&O tax of .471% and are responsible to collect sales tax and remit it to the state.

Custom software is considered a professional service, like accountants, engineers or lawyers.  The cost of custom software development is taxed at the service rate of 1.5% with no responsibilities for collecting sales tax from customers.

Here are the definitions for B&O tax purposes:  http://apps.leg.wa.gov/rcw/default.aspx?cite=82.04.215

Under the House Finance Committee amended version of HB 3191 (see attached), this would change.  Custom software developers would now be taxed the same as prewritten software.  This means that custom software developers would have to set up a sales tax collection system and charge their customers the sales tax rate based on their customer’s location (out of state customers are not subject to this requirement).

There are some exemptions to this requirement.  For example, customized software for Microsoft is often used as a component of other software Microsoft sells so Microsoft would not pay the sales tax but would have to give the custom software developer a reseller’s permit to be exempt.

However, large customers, like Boeing, banks, hospitals, insurance companies and utilities would have to pay sales tax, which would represent an added cost to them.  Large customers like this would likely seek to lower their costs by using offshore developers, taking business away from Washington based developers.

Washington-based companies might consider basing themselves in Idaho or Oregon to avoid sales tax collection responsibilities.  Or large users of custom software might seek out of state companies in an effort to avoid paying sales tax (even though they still have use tax obligations).

The administrative burden would be costly and time consuming to set up a sales tax collection system.  The responsibility would begin July 1.

There are many other provisions of HB 3191 that are troublesome for all kinds of businesses.  See the House Bill Analysis, http://apps.leg.wa.gov/billinfo/summary.aspx?bill=3191, for information on the economic nexus, tax avoidance, corporate officer liability and investment earnings provisions.

The legislature is desperate for money and does not want to raise the general sales tax so they are resorting to what polls well.  While they have made some budget cuts, the groups and unions that want more money are lobbying furiously for passage of HB 3191—and want the legislature to raise taxes even more.

This bill is on a fast track, so it is critical to contact your lawmaker today if you are concerned about this proposal.

Contact Lmcmurran@washingtontechnology.org if you have questions or concerns.