Oppose HB 1192 – The “Software Tax”

My longtime friend Marion Jenkins, CEO of IT consultant QSE Technologies wrote what I think is one of the most eloquent and well thought out rebuttals to the proposed Colorado “Software Tax” (HB 1192).  With his permission I’m posting it here in its entirety. If you feel the way I do about this issue, I urge you to take a stand on this issue.

I urge you to oppose HB 1192, the so-called “Software” Tax.  It is bad legislation and it will add significantly to non-productive administrative and legal overhead and kill productivity within the technology sector in Colorado (including not only technology-related businesses, but virtually every business – and every consumer – who uses technology).  It will also lead to a mass exodus of key jobs and technology talent from Colorado, and it runs counter to many Federal initiatives aimed at creating jobs, improving job skills and implementing automation and efficiency to help the country get out of this recession. It will also lead to a massive expansion of government, whose only function will be to try to interpret and unravel an impossibly complex set of new tax rules.  Those new government jobs will not provide any benefits to citizens, and particularly not provide any benefits directly to underserved populations, they will consist of auditors, analysts, enforcers and the like.

First, some background and disclosure:

1. I run an 8-year old information technology company in Englewood, QSE Technologies, Inc..  My family and I have lived in Colorado (Centennial) for nearly 12 years.  I live in House District 47 (Spencer Swalm) and Senate District 27 (Nancy Spence).  Our business is located in House District 44 (Mike May), and Senate District 30 (Ted Harvey) and most of our ~15 employees live in these same or surrounding Districts in the South Denver area.

2. I grew up on a family potato farm in SE Idaho and I have a PhD in Engineering from Stanford (also known as The Farm).  So I feel I have pretty good mix of horse sense and formal education.  I have been in the technology industry for 30+ years. 

3. I serve as adjunct faculty at the University of Denver, where I head up a graduate program division in healthcare information technology within University College. I serve on the board of directors and many other committees of the South Metro Denver Chamber of Commerce.  I also belong to the Aurora Chamber of Commerce, CHIMSS (Colorado Health Information Management Systems Society), AHIMA (American Health Information Management Association), CMS (Colorado Medical Society), CMGMA (Colorado Medical Group Management Association), CHSM (Colorado Healthcare Strategy and Management) and other business/technology organizations.

4. Among other corporate positions in my career, I have been a Chief Information Officer, Chief Technology Officer, Chief Operating Officer and Senior Research Engineer for small private companies, and also some Fortune 500 and even Fortune 10 companies.

5. This bill will NOT affect our company.  It will not cause us to raise prices or lay off people, or relocate out of state.  That is because we do not sell, or use, anything other than “canned” software, for which we collect and remit appropriate sales taxes.  Therefore I am not trying to protect any personal or business rice bowl.

6. Along with about 15 colleagues from CSIA (Colorado’s technology association) and other groups, I testified in opposition of this bill on Wednesday night/Thursday morning.  (thank you for your time and attention to our testimony, by the way). 

7. Although you sat through our testimony, I don’t think you understood it.  I think you saw and heard the same kind of turf-war, rice-bowl protection that you had been hearing all day.  The purpose of this email is to clarify some facts, because this is an extremely confusing issue.

There are many reasons why I oppose this bill (the way it is crafted, which in my opinion is a net new tax, which should go before the voters; the way all these initiatives were pre-packaged and front-loaded at the beginning of the session, before most citizens knew what was going on; the hearings that stretched into the middle of the night, in an obvious attempt to “wear out” the opposition; the way they are all characterized as “business” taxes, but in reality they will merely be passed on to all consumers – and therefore these are net new taxes on citizens, not on businesses.)

(As an aside, I have lots of other objections.  I object to this “nibbling at the edges” of the state’s budget deficit problem by trying to implement taxes here and there in a piece-meal fashion and splinter any opposition and paint this as a “business” problem, which sets up a “business versus K12 education” issue.  If the state has budget issues, which I believe it does, and needs to raise tax revenue (which has other options available such as cutting staff, eliminating duplication and programs and implementing automation – all of which businesses have been doing for the last ~2 years), then let’s raise taxes.  Don’t set up dozens of new statutes that tax sodas and candy and vending machines and Styrofoam cups and ketchup packets, go ahead and come out into the open and craft a bill to tax everything sold in a grocery store, including food, and/or implement a tax on all services (including attorneys, accountants and consultants) and take the problem to the people and see what they say.)

However, the only thing I am going to address in this email is the enormous complexity that makes HB 1192 simply impossible to implement and enforce, and that is why it should be opposed.

When Representative Pommer introduced HB 1192 to your committee Wednesday night, he positioned the bill in an incredibly simplistic fashion.  He said that people who download “standard” software (like TurboTax) from the internet should pay sales taxes, just like someone who buys TurboTax in a box at BestBuy.  His premise was that the delivery method of software – and whether there was actual media involved (i.e., CDs) – shouldn’t change whether the software should be taxed.  I actually agree with and could support that idea, at least in principle.

The TurboTax scenario seems straightforward.  But at the margins – for really large and really small software packages – this bill is a disaster.  On the low end, think of a download of small mini-apps:  a $.95 ringtone, a $1 MP3 song, a $2 e-book, a $5 upgrade to your GPS.  How can you tax those things, and would it even be worth it to try?  Do you tax a business traveler from Texas who orders TurboTax on his WiFi at Starbucks in Cherry Creek or a tourist from Oklahoma who does so from his SmartPhone while sitting on the chairlift at Vail?  How about a person who moves here from Boston but keeps his Boston phone number on his SmartPhone and uses it to surf the web and order “software?”

These are tricky but important details.

At the other end of the size/complexity spectrum, it gets even worse.  This bill defines “standard” software as any software package – or portion thereof – that is sold to more than one person or entity.  All such “standard” software (or portions thereof) would be subject to tax.  That has huge implications for virtually any business, whose software purchases and implementations are infinitely more complex than a person downloading TurboTax from the Web.

As an illustration, let me share with you the list below, which came to me yesterday in an email solicitation from a company that collects this kind of technical information from big companies and markets it to companies like ours, hoping we will buy their marketing/intelligence lists. 

This is a list of all the technology used by a Fortune 500 Company (not Qwest) listing all their major
technology systems, subsystems and software. 

Technologies:
Hardware/OS/Systems Environment

AT&T Sterling Commerce Yantra Warehouse, Cisco IOS, Citrix MetaFrame, HP-UX, HP-UX 11i, IBM AIX, IBM AS/400, IBM OS/390, IBM VSAM, IBM z/OS, INM CICS, Microsoft Active Directory, Microsoft Cluster Server, Microsoft Terminal Server, Microsoft VPN Servers, Microsoft Windows 2003 Server, Microsoft Windows NT Server, Norton Ghost, Novell NetWare, Red Hat Linux, Sun Solaris 8, Sun Solaris 9, Teradata Data Warehouse, Unix, VMWare, VMWare Server, Wyse Winterm, Avaya Intuity Conversant
Data Management / Business Intelligence
BEA WebLogic 8.1 / Oracle WebLogic Servers 8.1, BEZ Systems BEZPlus Data Warehouse Tool, DB2, File Aid, IBM Cognos, IBM Cognos PowerPlay, IBM DB2, IBM Informatica, IBM Informatica Builders WebFOCUS, IBM Informatica PowerCenter, JD Edwards World, Microsoft Access 2000, Microsoft SQL Server 2000, Microsoft SQL Server 2005, Microsoft SQL Server 7, Omniture SiteCatalyst, OmnitureHBX, Oracle 10g, Oracle 8i, Oracle 9i, Oracle Fusion Middleware, Oracle Hyperion, Oracle PeopleSoft Financials, Oracle PeopleSoft Financials 8.8, Oracle real Application Clusters, Qualys QualysGuard, SAP Business Objects Broadcast Scheduler, SAP Business Objects Crystal Enterprise 8.5, SAP Business Objects Crystal Enterprise XI, SAP Business Objects Crystal Reports 8.5, SAP Business Objects Set Analysis, SAP Business Objects Web Intelligence, SAP NetWeaver Business Information Warehouse, Security Innovation, Sun MySQL, Sybase 10, Teradata Active Enterprise Data Warehouse v2 R6,
Networking / Information Security
Connectria Integration Services, Progress Software DataXtend CE, Tuxedo, BMC Marimba 6, BMC Marimba 7, CA Unicenter, Cisco CiscoWorks LAN Management System, Citrix MetaFrame XP, Citrix Presentation Server 3.0, Citrix Presentation Server 4.0, Citrix Presentation Server 4.5, Citrix XenApp, EMC EmailXtender, HP Mercury LoadRunner, HP OpenView, Microsoft Internet Security and Acceleration server, Microsoft SCCM 2007, Microsoft SMS, Microsoft SQL Server Management Studio, Oracle Enterprise Manager, Oracle Identity Manager, Symantec backup Exec, Symantec Veritas NetBackup, Symantec Veritas Storage foundation, VMWare WorkStation, 123 EDI Shipping Outsourcing, Cisco PIX Firewall, ArcSight Log Consolidation system, Wavelink Avalanche server and client, Sygate Secure Enterprise Solution, Cisco Secure ACS Solution Engine,
Development / Programming Tools
Ab Initio, Adobe Coldfusion, Adobe Dreamweaver, AJAX, Altova mapForce, Altova XML Spy, Apache maven, Apache Struts, Apache Tomcat, Autonomy Interwoven sitePublisher, Autonomy Interwoven TeamSite, Borland VisiBroker 3.4, C, C++, CA ERwin, Citrix, COBOL, Compuware File Aid, Cywin, Eclipse, Embercadero Sapid SQL, Hibernate, HP Mercury Quality Center, HP Mercury Test Director, IBM Rational Clearcase, IBM Rational ClearQuest, IBM Rational Rose, IBM WebSphere Application Server, IBM WebSphere MQ, Java, Java Beans, JavaScript, JSF, JSP, JUnit, Microsoft .NET Framework, Microsoft ADO.NET, Microsoft ASP.NET, Microsoft C#, Microsoft Internet Information Services, Microsoft Office Communications Server, Microsoft SharePoint Server 2007, Microsoft Sybase T-SQL, Microsoft Team Foundation Server, Microsoft Visio 5, Microsoft Visual Basic .NET, Microsoft Visual Basic 6, Microsoft Visual Basic for Applications, Microsoft Visual SourceSafe, Microsoft Visual Studio 2005, Microsoft Visual Studio 2008, Open Text LiveLink 9.2, Oracle BEA JRockit, Oracle BEA Tuxedo, Oracle BEA WebLogic Application Server, Oracle PL/SQL, Oracle Primavera TeamPlay, Oracle SQL*Developer, Oracle SQL*Loader, Perl, Progress Software DataExtend CE, Red Hat iPlanet Web Server, Red Hat JBoss, ROBOT, SAP Business Objetcs Application Foundation, Spring, Sybase powerbuilder, Tibco rendezvous, TOAD, Vignette Builder, Vignette Content Server, Scrum Development,
Enterprise Applications
Amdocs Clarify CRM, Amdocs ClearCall Center, Amdocs Clearsales, Amdocs ClearSupport, AT&T Sterling Commerce Yantra Warehouse Management System, Descartes Mobitrac Transportation Execution System, EMC Documentum, Hodes iQ Talent Management, IBM Lotus Domino, IBM Lotus Notes, Lotus Notes, Microsoft Exchange 2003, Microsoft Exchange 2007, Microsoft SharePointServer, Open Text BlueBird, Open Text Hummingbird RedDot Enterprise Content Management, Oracle Financials, Oracle PeopleSoft 7.5, Oracle PeopleSoft 8.9, Oracle PeopleSoft 8.8, SAP Global Trade Services, SAP R/3,
Other Technologies / ITO Agreements / IT Intel
ABC has created a custom application server using Oracle Fusion Middleware and Oracle WebLogic Server called ABC Unified Strategic Information Optimization Network, or FUSION. It allows the company to eliminate the lines between their separate business units as well as improve customer satisfaction, 123 EDI Shipping Outsourcing, ArcGIS geographic authoring, BGT Partners consulting for B2B portal and CMS, Clarity Consulting for ABC QuickShip Application Development, Computer Aid, Inc. for managed mainenance automotive), Connectriaintegration Services, Cstomer Fsion Database, Dun & Bradstreet Dashboard, Google Analytics, IBM Global Technology services, Interknowlogy consulting for Application development, Loftware barcode and RFID Software, Microsoft Visio, Microsoftproject, Quad Graphics Parcel Direct, Six by Six, Telefonica Datacenter

Look through this list and ask yourself this question…do you think your 0.95 FTE employee in the DOR (which was claimed to be the only headcount needed to implement/oversee HB 1192) would even have a clue as to half of what these software packages are, how they are used, and which ones are “standard” and which ones are custom, or how and to what extent some standard modules may be embedded inside of the corporation’s customized software systems?  I have been in technology for 30 years and I recognize barely about 75% of them.

It would take a small army of experts to figure this out.  The other night I gave you a SWAG number of 25 DOR FTEs to oversee this.  After further thought my slightly more educated SWAG is now well over 100.  An equal number of non-productive administrative/audit people would be needed on the other end, within businesses who use technology, as well as their technology partners.  Every software project would have to be separated into “standard” (taxable) and “custom” (non-taxable) categories.  You would literally have to go through the software code line by line to determine compliance.  And, by the way, software code isn’t even written or measured “line by line” any more.

Any similar company (Colorado currently has 11 Fortune 500 Companies) would have a similar list.  Obviously a smaller company would have a smaller list, but even a 20-person company can easily have dozens of software applications, some “standard,” some custom, and some a mixture.

This is a nightmare.

As a result of your other tax proposals, will people go to Cheyenne or Salt Lake for a Pepsi or a Snickers bar or Chinese takeout?  Will Colorado businesses close down or move out of state if some of their supplies now get taxed?  Will Colorado consumers stop buying things on the Web if they have to pay taxes on them?  Those are debatable. 

Would technology jobs leave the state as a result of HB 1192?  Not only is it a definite yes, but you must understand that it is relatively easy to do so.  Moving a manufacturing facility is hard.  Moving a technology platform is easy.  Any sizable company would find it easy – as well as advantageous – to move their technology to Seattle or Omaha or Minneapolis to avoid the brain damage of auditing and accounting for and paying the taxes under HB 1192.  Not only would that company’s technology jobs move along with the technology platforms, but the jobs of any outside consulting/implement
ation partner would move out of the state as well.  And no large or growing company – and definitely no high-tech company – would consider moving into or investing further in Colorado if faced with this imposing and formidable barrier to technology, automation and efficiency.

There are many other technical issues…SaaS (software-as-a-service).  Cloud Computing.  Virtualization.  Managed Services/Hosting.  Object-oriented development.  Data center hosting.  Disaster recovery and remote/hot site services.  Software re-use.  Service-oriented architecture.  Software toolkits.  Telecommuting and virtual workforce.  Hosted telecom apps and VoIP services.  These are just some delivery methods and technology concepts that are at the leading edge of the technology frontier, and Colorado is at the forefront of these and other innovations.  Every one of them has special circumstances that will have to be investigated – and analyzed and unraveled – to comply with HB 1192.  So instead of spending time on productive efforts like innovation and implementation, companies will have to invest significant time in non-productive audits and compliance.

I want to emphasize again that this doesn’t just negatively impact technology companies like QSE and our peers, it affects every business who uses technology in their business.

Additionally, in Colorado and elsewhere, there is a shortage of students entering STEM – Science, Technology, Engineering and Math.  There are many formal and informal initiatives aimed at training and re-training both youth and adults to enter or shift to the technology workforce.  Several Federal jobs training programs are focusing on these efforts.  In addition, information technology is at the core of green/sustainable energy initiatives.  HB 1192 runs counter to those efforts, and would undoubtedly stifle future growth of talent here in the state, and cause the loss of federal education and training funds.

And lastly, the ARRA/HITECH act earmarks $19.5 billion in Federal funds for the implementation of IT in healthcare, which has shown to help lower our outrageous healthcare costs, reduce costly medical errors and improve patient outcomes.  Providers and other entities are reluctant to adopt automation and technology, primarily because of costs and other barriers.  By taxing software, HB 1192 increases those barriers, and would definitely cause the State of Colorado to miss out on some of those federal funds…they would go to other healthcare entities in other states. 

This issue isn’t about the software industry, or even the technology industry.  It’s about every business and every consumer in the state.  Technology is one of the few industries that is helping to lead the recovery, and helps all businesses become more efficient.  Colorado has grown in talent, infrastructure, and status to become recognized as a critical technology hub, and this bill will absolutely reverse that trend and shift the jobs and the capital investments to other – and eager – states.  But our testimony earlier this week, and this email, isn’t to protect the technology industry from further taxes.  Although the citizens and businesses of Colorado don’t realize it, my CSIA colleagues and I are working on their behalf.  Most of them don’t even know yet that HB 1192 exists, or what negative impact it would have on them.

In summary, I urge you to oppose HB 1192.  Its unintended consequences and confusing definitions are anathema to the economic health of Colorado.