A two-year effort to try to make sure Idaho doesn’t discourage high-tech businesses through its sales tax laws has now swung the state to the opposite extreme, with multimillion-dollar software package installations set to switch from taxable to tax-free on July 1.
It all stemmed from efforts by the Idaho Technology Council and businesses to get lawmakers to remove sales taxes from “cloud” services – where people remotely use software that’s located far away, without ever actually purchasing the software and installing it on their own computers. Legislation that passed and was signed into law in 2013 granted a sales tax exemption for those uses of software over the internet cloud, after Idaho tech businesses told lawmakers that without an exemption, some likely would leave Idaho.
That new law didn’t exempt the three other ways of delivering software that people or businesses buy: Buying a disk at an office supply store; downloading software online; or installations of major enterprise software systems at businesses that are done through the “load and leave” method, where the vendor comes to the business and installs the software, then leaves it.
This year, the Technology Council came back to the Legislature and said the first “cloud” exemption wasn’t working, and the state Tax Commission’s interpretation of it was too narrow. The council, joined by some of the state’s largest businesses, pushed legislation to exempt both downloaded and “load-and-leave” software sales, too. Though the discussion was all about accessing the cloud and the new high-tech options available to businesses, the state stands to lose as much as $40 million a year in sales taxes in the future – much of that from very large software system upgrades at big businesses.
Backers of the bill have touted it as clarifying the definition of “remotely accessed computer software” and treating cloud-based services like other tax-exempt services, from health care to haircuts. But the biggest beneficiaries may be banks, hospitals, and other large businesses when they upgrade their internal software systems, regardless of whether there’s any remote access involved. You can read my full story here at spokesman.com.
Idaho Tax Commission Chairman Rich Jackson said Idaho typically doesn’t apply its sales tax to services. But since 1986, when the state first examined the issue, Idaho has defined software as “tangible personal property,” which is subject to sales taxes. “We started saying, ‘This looks like, smells like tangible personal property, so we’re going to tax it as such,” he said.
Idaho’s new law makes the leap to declaring that software isn’t tangible personal property at all, unless it’s on a physical item like a disk. Now, the Tax Commission is in the midst of a series of negotiated rule-making sessions with industry representatives to figure out how to implement the new law.
The Technology Council insisted to lawmakers that it was talking about services that never should have been taxable, so the fiscal impact on the state would be negligible. Mike Chakarun, tax policy manager for the commission, said, “I don’t know if they fully understood the types of transactions that we see that were held taxable previously.”
The new bill, HB 598, excludes entertainment items, like e-books or video games, from the tax exemption. But it also adds the two other delivery categories to the exemption, giving Idaho one of the nation’s broadest tax exemptions for software sales; only six other states go as far. As of July 1, when the law takes effect, the only software sales that will be taxable in Idaho will be those where the purchaser buys the software on a physical storage item, like a TurboTax disk. The same TurboTax program downloaded online will be tax-free.