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.

Through the CSIA and their relationship with the Governor’s office, we have learned that not only is the house committee trying to fast track the vote on the legislation (they are voting early this week!), but also that its effective date has been accelerated to March 1 instead of July 1.

To make matters worse, the committee and Governor’s office have yet to share the specific language of the bill with the public.What we know is on the table are additional taxes on electronic downloads, SaaS-sold software, custom software development, and even “IT services” (as vague as that is).

The CSIA has estimated that this will likely add an 8-10 percent tax burden to all software purchases across the state.Technology companies and professionals in Colorado already spend 1 to 2 billion dollars in taxes a year, and this new tax would only deepen that burden.

As the majority owner of a small software development company, I would like to make it clear to the house committee that if this proposal is passed, companies will flee the state.Unlike most other industries, software development can be done from anywhere in the world, and team members can collaborate across continents.Realizing this, it should also be understood that to attract software companies to your state and city, you must provide an environment that attracts them.This is indeed what has been happening across our state, even in the midst of the recession, Boulder especially.

Boulder is a hot bed of tech startups.According to a Business Week analysis, Boulder came in first in a list of “Top Small Cities for Startups”, citing 5.5 startups per 1000 inhabitants.There are a lot of small cities around this nation that would love to claim this mantle, and while the Boulder culture is well suited to the startup lifestyle and we who live in both Denver and Boulder love to live and work here, that is not powerful enough to fight the sheer economics of the situation.If I’m put into the situation where it is either move out of town or close shop on Planet Telex, I’ll be moving- and I’d wager most small companies are in the same boat.

The 5500 technology companies employing over 175,000 people in Colorado are a major reason why Colorado has only 7.5% unemployment right now as opposed to the national average of 10%.I can’t believe that those in governance want to jeopardize that right now.2009 was a tough year for most of us, and while I’ve been optimistic about 2010, it is clear to me that the industry is still not at pre-recession levels, and many of us are still struggling.This proposal does nothing less than kicks us while we’re down.It will hurt my company, it will hurt many other small companies in Colorado, it will deter new companies from moving to Colorado, and will ultimately hurt the future development in this state.

The CSIA is working with several law firms and lobbyists to fight this new measure, but that effort needs support from the industry.To that end, I encourage anyone who will be affected by this new legislation to call or email the house committee representatives and voice their dissent.Below are phone numbers and email addresses of key people on the House Committee and the Governor’s office.Urgent action is needed; remember they might vote as early as today.

House Committee Representatives:

Governor Ritter’s office:303-866-2471

– Update 3:10PM –

The measure is HB 1192 and is being lumped together with twelve other exemption/credit reversals in an effort by the governor’s office to rush this through legislation. It will be voted on Wednesday, Jan. 27th.

– Update Jan. 28th –

Bad news, HB 1192 advanced this morning, 6 voting for, 5 against.  It is scheduled to be heard before the House tomorrow.  There is still time to voice your opposition though, call or email the representatives today, you can see a list of ALL members of the house here.

The new tax regulations will mean that:

• Data centers will have to collect tax from all of its customers that had “users” with access to the SaaS system located in Colorado.
• Charges to customize “base software” could be taxable if not separately stated from the overall purchase of software.
• Taxable software would include all prewritten updates/upgrades.  If these charges are not separately stated from a maintenance fee, the full charge for maintenance and update becomes taxable.

Not to mention that this is a NEW TAX that we, the people, CANNOT VOTE ON.  This is a violation of our state constitution (the TABOR amendment).  So,this is an illegal tax that will drive jobs out of our state.