My first foray into our political process, testifying as a witness before our State Senate here in CO, and I’m on the losing side: HB 1192 passed last night 4-3. I can’t say that it was unexpected; it was part of a whole line of tax increases to a variety of industries throughout our state. Direct mailing companies and vending machine owners are in the same boat, and the voting on each of these bills was strictly partisan: Republicans against, Democrats for. And the Dems have the majority, so HB 1192 passed.

This bill is extremely complicated and riddled with glaring loopholes that I tried to explain to the Senate Finance Committee to no avail. The bill’s goal is to tax only the download equivalent of shrink-wrapped software, which is currently taxable (which by the way, is how they avoid the whole TABOR amendment issue). The problem is that software is a big amorphous mess that defies almost any attempt to rein it into legal language.

For example, most software solutions for companies involve combining a number of pre-packaged software solutions into a larger, custom solution. Does the tax apply to the components of the custom software? If a client buys a software solution from a vendor and then has that vendor customize that software, do you deduct from the software tax based on the lines of code customized?

Try as they might, the Senate did not have a good answer for these questions, but passed the bill anyway. See, the biggest problem with this bill is that is can discourage companies from entering our State, but offers software companies a dozen ways to avoid these taxes simply by changing how they structure their work contracts.

Another oddity: They explicitly have excluded SaaS models from the tax, for some sensible reasons. However, at Planet Telex we sell our inTouchUI as either a download that a customer pays once for, or as a monthly service. So we have a single code base that is taxable if we sell it one way, not taxable if we sell it another. Will this ruling have the odd effect of pushing more companies to adopt SaaS business models? I expect so.

I also brought up another glaring loophole that was misunderstood by the Senate and not addressed at all. It is this: software will be taxed based on a “use model.” This basically means that purchasers should pay a tax per user of the software. They did this so that the physical hosting of the software (where they data centers are) wouldn’t make any difference, hoping this would avoid a mass migration of data centers out of the state. So customers are to be taxed per user of the software at the time of purchase.

Put yourself in the shoes of a CEO trying to get his company through this recession. You have 25 employees and you need a specific software package that would be taxed by this law. That tax will be incurred at the time of purchase for the number of users who need access to the software. Let’s say that ideally, you want all of your employees to use this software, but don’t want to pay tax on 25 users. Software vendors have long known that people take liberty with the licenses we sell them. Odds are that CEO buys a license for only a couple users within that company, and somehow all 25 people will end up using it. Now the state and the vendor get short changed.

Of course, the legality of all of this hinges upon whether this is a new tax or an existing tax. Those that want to you believe this is an existing tax argue that a download is no different than a CD or DVD contained in a box. Oh, except that one is a “tangible personal asset” and the other is not, which is the litmus test they are using to make this determination.

I have downloaded thousands of .zip and .exe files in my day, yet I’ve never held one in my hand. The state has some powerful legal minds working on this bill, but the one thing they will never be able to convince me of, is that bits are tangible. I’ve been in the software business for over 10 years now. I have never seen a bit, felt a bit, heard one, nor tasted one. I interface with software that flips bits on and off, but I don’t even consider that tangible. I don’t have any disks for most of my software- I therefore cannot hold Google Chrome in my hand. It’s an asset to be sure. Personal? Maybe. Tangible? Definitely not.

The saddest thing is that because most of the money these new bills raise is to be spent on education it seemingly pits the software industry against the welfare and education of our youth, which is exactly how the Senate Democrats see this issue. It is a particularly unfair way to look at it, because the software industry in CO has been working hard to improve education throughout the state. The CSIA and Planet Telex were among many software related entities at this year’s STEMapalooza, an event meant to encourage kid’s interest in science and math. One of the most talented programmers I know has been working on a computer based learning system for kids for the last 2 years. Many of us have kids of our own. Of course we want our kids to have the best education possible. I don’t even have kids and I have been trying to connect with educators on using new multi-touch devices (like the Microsoft Surface) to enhance our classrooms. We all understand that our kids are the key to success in the future for our nation and state.

The problem with HB 1192 is that it is illegal, won’t do much to help, and will stifle our technology sector. It is illegal because it violates TABOR. It won’t help much because it has a ton of loopholes in addition to not helping much in the first place (it fills in only the tiniest fraction of our deficits). It will stifle technology because technology companies are very mobile and have a habit of setting up shop in the friendliest environment for their business.

For a long time, Colorado has been a very friendly environment to software companies. Ergo, software companies have come here in droves and some have flourished. All have created jobs. There are those of us that believe that Colorado’s technology sector is a major reason why our state is faring better than the national average in this recession (both unemployment and deficit are better here than most states).

Those who know me know that my politics run more liberal than conservative, but I am as always, an independent. So I feel a little weird being all cozy with Republicans on this issue, but the plain fact remains that I don’t think this bill will do very much good and will do some damage. It saddened me yesterday to lose right down party lines. Even a few sensible amendments from Keith King (R) were roundly rejected along party lines. If our political system is broken, it’s because people no longer make decisions in governance, political parties do. And while you can reason with a person, you can’t reason with a party.