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February 26, 2011 07:02 AM UTC
80 Comments
An open minded person is willing to change their view based on new facts. Reading this in depth makes clear that income taxes are way too volatile and for all their imperfections, sales taxes seem to be the best approach (at present).
But to make sales tax work effectively we need to have a couple of changes:
1. The tax is on everything – services, food, bull semen. So there is no question of “is this taxed?”
2. There are no exemptions. There is no proof that any exemption provides any value and this tilts the playing field and again makes determining taxes difficult.
3. The state sets up a single place to report & pay all taxes. It provides an API to provide the tax rate based on address – and it has to be correct (ie not work from just zip code).
4. The state needs to set up clear, simple, & reasonable rules for where a sale is taxed. At present about half the sales scenarios my company hits the state doesn’t know what jurisdiction it should be taxed in (thank god we rarely sell in Colorado).
5. The state needs to have a competent Department of Revenue. Roxy & her band of Merry Incompetents guarantee that business will continue to fight the state on sales tax.
Sales taxes are regressive by nature, but taxing food and clothing makes this tax even more regressive.
Trying to apply sales tax to services would be almost impossible to do and enforcement would be a nightmare. How would you propose applying the tax when a neighborhood kid mows your lawn, for example? Or you hire a handyman to haul stuff away to the dump? Or the visiting nurse stops by to see your elderly neighbor?
Getting medical care costs under control is vital. How the state can do it going against big pharma, hospitals, medical device manufacturers and human greed in the medical profession may be impossible. But we as a society cannot keep paying at the current, ever increasing, levels.
Then you can tax lawyers & accountants when they send a client a bill. Much easier.
One reason to include services, a lot of items sold fall between product & services and that eliminates all the tap dancing used to move those items into the services side.
A second reason is is about half the economy and so it will double sales tax revenue. Why is it the software company next door that provides programming services pays no sales tax but my software company does because it provides a software product?
Services are services; programs are programs. If you work at a services-oriented software company, you sell your product and you sell services. The two don’t overlap, and I believe we’ve covered this before…
We sell “support & updates” where you must by the combo. Support is a service and updates is a product. So is it taxed?
Answer is it’s not clear so to be safe we charge sales tax if the purchaser is in Colorado.
Colorado DoR FAQ on custom software and services
The bottom line seems to be they didn’t think of this case and so don’t have an opinion.
If you sell support and updates and you put two separate line items in, one for support and one for updates, then the support is not taxable.
If you cannot separate the support from the updates, then pay the tax.
So while they pay for both, they’re only using the support half. In addition neither is performed in conjunction with the other. Some customers use support only. Some install the upgrades but have no questions so they’re upgrades only. Neither requires the other.
let me see if I understand this . . .
but,
because,
I’m thinking that maybe the solution to your problem might lie very close to home. Of course, I guess one could always ask what kind of lame-ass government it is that can’t solve the fucking problem that I’ve worked so hard to create? But, then you’re already asking that question, aren’t you? . . . curse you all to hell Roxy Huber!!!!
(Dave, on a serious note, If you would let me know how much you’d be willing to pay to solve this problem, I’d be happy to examine your price-point data and put together a pricing structure proposal that properly incentivizes combo purchases while at the same time giving some clear marketing advantages to having the option for separate purchases. All else being equal, it seems fairly clear to me that if all your competition is forcing software clients to pay for updates that they know they won’t ever use, that your company could develop a separate pricing structure to create a competitive market advantage.)
But there are very good reasons that this is standard practice in the industry. If you want to call me, I’d be happy to go over it off the record.
and I do understand. Software is amazingly complex and there’s no way of determining all the potential problems that can arise in all the various permutations of operating systems, etc., etc., prior to any particular release. Catbert and I will just have to search elsewhere for income opportunities.
But, it sounds to me like this is still not as complicated as it’s being portrayed — it’s likely that although your updates have some intrinsic value (especially the cost to your company) they are probably being offered to your clients as free value-added services to the core software purchases.
The sales spiel, I imagine, goes something like this: “If you buy our new XYZ, version Z.ZZ, product for $xx,xxx.xx, we will provide to you, at no additional cost, lifetime ( . . . or maybe it’s a set time frame of perhaps three, or five years . . .) upgrades and updates at no additional cost . . . ”
Guess what the taxable value of the upgrade portion of this purchase is? Hint — they’re being offered as no cost, value-added services. (It’s like when you or I go to make a car purchase and to incentivize the purchase, the dealer says — “If you buy this car today for $25,000, we’ll throw in at no additional cost all regularly scheduled maintenance services for the next thirty-six months.” The car purchase price isn’t reduced by the dealer’s cost of thirty-six months of service on the purchase invoice — the customer, you or I, will still pay sales taxes on the full car purchase price of $25,000.)
I understand why you would want to show a lower software purchase price in order for your customers to save some sales taxes (that’s probably the way your competition is doing it, so not doing so would make you less competitive) — but it wouldn’t change that the upgrades are free services in the sale.
I could be completely wrong here, but this would be my uneducated guess . . .
What I find fascinating is people saying we should restructure our sales to match the world view of the department of revenue. I think that is the tail wagging the dog.
Sorry, but if we let the state bureaucracy negatively impact companies, that will reduce job growth. I think in the present employment situation we need to push the state to reduce as much as possible the negative impact they have.
A BIG part, you know?
Quit whining.
But when I see the state unnecessarily reducing job growth – I’m going to bring it up. A couple of jobs here, a couple there may not seem like much. But they’re the world to the people that would have become employed.
I also think it’s sort of sad that your approach is that the state is screwed up and we should just suffer silently. That is a road to an even more inefficient system.
It’s not a big deal in our case, our customers are price insensitive and we have (thankfully) very few in Colorado. So we charge tax on everything in state and we rarely have to hassle with it.
But there are a ton of software companies just getting started in Colorado. Many of them will probably have heavy sales in state. I’d like to give them every chance to succeed and grow – and see more people get jobs.
is a long way from the state reducing job growth.
That’s a real stretch; a hypothetical with a flawed premise.
Is that legal? Have you considered that your admission you are charging tax for sales you suspect aren’t taxable might be the reason for your audit, not the fact you’re complaining about Roxy at every opportunity?
Then one has to make a judgement call. We took the safe route.
I don’t know what compelled me to be so presumptive. I know you dislike the system and its complexity, and I clearly don’t understand all, or even many, of the whys. I hope I’m not seeming as though I’m making light of your concerns or issues.
I didn’t understand anything until we started looking at this. And I’m still learning. It’s not simple.
Support is services.
What part of that is hard to understand?
If you’re not billing them separately, then maybe your business acumen needs to improve.
For the same reasons it’s common practice in the software industry.
… you pay sales tax on them. Read the plain text of the link I posted. You charge for them together, you collect sales tax on the whole package. You separate them out, you can give your customers a break on the tax.
PS – if you sell updates and support together along with a license key, just a note for your company in advance: in some countries, software companies must offer an in perpetuity license option with no ongoing maintenance – software is still an actual product and not a contracted lease in some places. IMHO it should be in this country, too.
You just don’t get questions answered or new versions if you stop paying annual maintainance.
That’s really IMHO the way it should be done anyway, and good for your company for doing it.
sales tax acts of 1935 and 1937 that had not only a sales tax on things, there was also a sales tax on services. That would probably do a great deal to answer the study’s desire to tax a larger portion of economic activity.
It would make life simpler and increase revenue.
How do you impose a sales tax for services on the kid who mows your lawn, or the handyman who hauls trash away, or the visiting nurse?
Do all of them have to join “the cloud” when few even have a computer?
Try thinking about it where the real people live.
That’s one of the reasons I don’t like them. But as I purchase a Yves St Laurent suit to wear to Whole Foods to purchase truffles – I don’t think giving me a sales tax break on those purchases is serving a public good (disclaimer – IRL I don’t own a suit and shop at King Soopers).
I’d like to see it handled another way. Maybe no income tax on the first N dollars of income. Or a promise to focus adequate state resources on the poor so on balance it is more than fair.
Food needs to be exempted from sales tax. There are some possible exceptions like taxes on soda and such, but broadly speaking necessities should be taxed minimally. Your examples of luxury items can be taxed as luxury goods; there’s no real moral issue there.
But I’m more curious how you came to the conclusion that everything MUST be taxed and there MUST not be any exceptions. Is that just because it would make things slightly easier for you? Because it would make things much much worse for most other people. What was the thought process that led you to this extreme and poorly-justified position?
I understand excepting basics and I don’t disagree with that. I also dislike sales tax because it’s regressive. But I also see problems with the exception.
First it includes not just the necessities of life for the poor, but also very expensive food for the rich. So it’s not directly targeted.
Second, you always have items that are questionable, like what candy still got a tax exemption and what didn’t. So effort goes into gaming that.
As to would it make it any easier for me? Nope. We don’t sell food.
and I think you know it is. You get 10 points for a funny example, though.
Sales Tax, Flat Tax – All terribly regressive!
…would that require a vote (TABOR)? Or does expanding what is covered not require a vote? If no vote is required, then here’s a way to significantly increase tax revenue that the legislature can do on their own.
To eliminate exemptions, no TABOR vote is required. (see soda 2010).
To add new categories- TABOR vote is required.
So it depends on how the law is written. If only there was a requirement to provide transparency and visibility on allt he exemptions and their impacts.
It is important to distinguish services. Extending sales taxes to services is not just a matter of TABOR elections. It is also a matter of a very old Constitutional provision that prohibits the taxing of human labor
I think that’s a really good point. If we start taxing services with a sales tax do we eliminate the income tax? Or double tax services / labor?
My company sells a software product (taxable) and we also sell consulting (services). In both cases we bill the customer and are paying salaried employees to perform the work.
Why are they viewed differently?
The only thing I sell is my services (blush). If I pay sales tax on them I will pay income tax on the same amount. If it works like social security, I can pay taxes on the gross for three different taxes. Sweet!
to get rid of TABOR, 23, and maybe even Roxy and replace them with a constitutional structure to address all the findings of the review? A long shot, but, I’ll be happy to peddle the petitions, or whatever it takes. The whole kit and kaboodle needs to be changed. Besides: fuck TABOR.
The other big thing that jumped out at me from this is the costs the state faces will grow about 3% faster than income. The bottom line is that we have to cap state spending at a set percentage of state GDP. If it grows, no matter how small a rate, that exponential growth will eventually hit a percentage of GDP (well before 100) where the state will collapse.
Yes we’re a bit below where we should have funding today. But say we had adequate funding levels today. In 2 years that same level would be “too low.” Simply increasing funding today is a short term solution. We also need to address the spending increase side.
And key to that is medical costs.
Perhaps you haven’t noted some things the economists have been saying for the past several years.
First, government budgets, in order to do their best by the economy, should be counter-cyclical. That means that they explicitly CANNOT be tied to state GDP or they will be hamstrung at precisely the time they are needed to be strong.
Second, healthcare costs are exceeding inflationary growth. Yes, we need to reign that in, but I think strict and automatic caps based on GDP are a disincentive to doing the hard work needed to fix the problems our health care system has.
It is saying that long term the cost for the state to provide its present level of services will grow faster than the state GDP. According to the study this disparity will hold into the foreseeable future.
Yes the state needs to spend more when the economy goes south and spend less when things go well. But on average over the cycles it needs to be a constant part of our GDP.
I don’t think we have any choice other than to cap state spending as a percentage of GDP (averaged over several years). Anything else will break us. And the cap won’t avoid doing the hard work to address health care costs – it will force us to face it.
But if you hamstring the government from spending during a recession by capping at GDP, you have the same problem we have with TABOR now, multiplied.
At some point we have to break out of this mold that says that our state legislators must be morons and can’t be trusted to run the government that we elected them to run.
My point is that over the long haul – over the ups and downs, the amount cannot grow over that time at a rate greater than our GDP. In a downturn yes we need to increase. But then in the upturn we need to decrease by the same amount.
My concern is that the D.U. study says the state will need a large chunk of the GDP in good times as well as bad.
Things cost money. We’ve been proportionally decreasing the amount of money coming in from various revenue sources for a long time now, and in this past recession we’ve been propped up by the Federal government.
We haven’t increased gas taxes in ages, property taxes are being forced down constitutionally, we’ve been under the effects of TABOR and A-B for many years… And then on top of that the government provides services that lately have exceeded economic growth indicators.
So, speaking honestly, we need to increase the revenue stream significantly if we want to rejuvenate our government’s fiscal stability without cutting out the bare bones we’re already down to.
But say you get tax receipts tomorrow to the level they should be at now. And lets say the economy runs fine for the next 10 years (like under Clinton).
If at that time the cost of providing the needed services increases at a faster rate than the state GDP, we’re on an unsustainable course. And I see that when the study says educational costs will grow at 6% and medicaid at 8% annually when out GDP is growing at under 3%.
That’s not a sustainable model.
In 1989 the state budget for higher education was $500 million. The proposed budget for next year is $520 million but the dollar today is only worth 25 cents compared to a dollar in 1989. The state’s contribution to higher education declined by almost 75% over the past twenty years because of TABOR and other amendments like Amendment 23. If we are going to provide affordable colleges and universities this simply can’t go on.
In yesterday’s paper that can’t be named the study showed that under present revenue streams all new revenue between 2016 and 2025 will go to K-12, prisons and medicaid which means no additional funding for higher education or transportation.
As things stand today, the right wing’s endless search to starve government in the bathtub is succeeding.
Where are you finding that? A dollar today is worth 56 cents compared to a dollar in 1989, not 25 cents. (See this inflation calculator ).
Everything else you say is exactly right, but let’s get the numbers right.
I got my figure from a meeting I attended three weeks ago on higher education. I looked at your inflation calculator and double checked on two others and all three, as one would expect, came up with the same number. The dollar today is worth 56% of what it was in 1989. I stand corrected.
Let me repeat, I’m not challenging your underlying point.
But the CPI is not a fair measure for higher ed expenses.
Unsurprisingly, there are a lot of things consumers buy that schools do not buy. And to the degree there is inflation in typical higher ed expenses, it has exceeded the CPI.
So- $0.25 may be low – but $0.56 is too high.
Either way- Colorado revenue is screwed until we fix it.
We would raise a lot of revenue if we simply came up to national average.
My vote is to make the income tax rates more progressive. Make taxes lower on the lower income, and raise them on the higher income. I don’t mind if these are brackets, i.e. rich, middle and poor people pay 3% on the first $24,000, rich and middle class pay 5% on the next $40,000, rich pay 7% on everything above $60,000.
Median income in Colorado is in the $50k range.
I’m not completely opposed to sales tax… We get some revenue from tourists and the underground economy. (Same thing for gasoline and property taxes: Poor people pay property taxes, even if they rent.)
Sales tax hits the poor more than the rich because a much higher proportion of poor people’s income is spent on purchasing “things”, as opposed to putting it in the bank or investing in stocks, for example. Removing food from taxes helps is just the fair thing to do, and makes the tax less regressive.
I wonder if the DU study looked at how different taxes shift behavior, what the economic impacts of tax policy are, and whether the tax policy sucks money out of Colorado or helps retains it.
BEHAVIOR MODIFICATION: Raising the gasoline tax to fund mass-transit and renewable energy would make it beneficial to change our purchasing and life-style habits. Has a direct long-term benefit to Colorado economy to the extent that we ship less $$ out-of-state for oil.
ECONOMIC IMPACT: Economic multiplier (divisor?) of taxes is different for poor people than rich. Sales tax cuts directly into sales of goods because it makes them more expensive.
COLORADO SPECIFIC: Investing in infrastructure and schools within Colorado directly builds for the future within the state. Think of all those CSU professors grad students starting up Photovoltaic plants.
It’s regressive, it reduces consumption which is the last thing the economy needs, it’s a giant PITA to collect. All very spot-on points.
But there was a key item in the study that I think trumps all that. Income tax is highly volatile and not terribly predictable. Part of Colorado’s problem is the emphasis on income tax.
So I’m open to alternatives, but we need something workable.
Just ask Colorado Springs, an over-reliance on sales tax compared with other munis and counties is what got them in this mess. I don’t think “we should follow Colo Springs’ lead” is the best rallying cry.
And one of their main points was that income tax is a lot more volatile than sales tax.
If there’s a strong argument to go income tax instead of sales tax, I do want to hear it. Because I think income tax makes a lot more sense both in fairness (if we make it progressive) and in reduced overhead.
is the rapid shift in our economy from products to services.
This is an important point:
A progressive income tax can do this without any of the regressive side effects of a sales tax A.K.A., broadening the base and lowering rates for most people. I also think this can be sold to voters well. A talking point like,”75% of Coloradans will receive a tax cut under this plan”, might be very effective.
Also, raising the corporate tax is a great option. Currently, corporations have the same tax rate as individuals.
Combine both of these, and we have a plausible solution to changing some of the structural problems with the budget.
Not a single post here has mentioned the decline in corporate property taxes yet. We have buildings that have been sitting mostly vacant since the economy was good, because there are incentives to building things that apparently outweigh any risk considerations. And while all of this property is lying around, it isn’t generating, proportionally, the revenue that it used to.
We need to re-evaluate the level of our severance taxes, too – I believe the last time we talked about the horrors of our new O&G regulations, it came up that we are one of the lowest severance taxes in the country.
And we need to push to reevaluate capital gains taxes – at the national level. With so much profit-taking going on in the speculative markets, why are we letting rich people get away with obscenely low tax rates on that income?
A progressive income tax would be a Good Thing, IMHO.
A simplified sales tax system would be nice, but you’d have to get the cities and counties to buy into whatever solution you propose.
Increases in the gas tax, indexed at the very least to inflation, should also be considered.
And I think it’s high time we started to re-evaluate school funding, possibly moving much more of the burden (and corresponding tax collection) to the state level. The current situation is unsustainable and unfair to the poorer districts.
There are so many bits of our tax code that have either lapsed or been tangled up in each other that I hope someone steps up to the plate to provide some comprehensive solutions.
The choice is not between sales and income tax, both of which are too tied to swings in the economy.
Has anyone asked why it is they picked DU to do this analysis? I think I would have much rather seen a state institution perform it rather than a private one.
to a similar study by CU Denver. They came to a lot of the same conclusions
The tax you should be paying
This sounds very workable although I wonder if Colorado would be willing to do this since all the home rule cities presently seem determined to each keep their own rules and system.
As to why Amazon is fighting it, apparently the present complexity is too much even for them:
but guess who isn’t playing.
click on the little map.
You know, Oregon looks good. They have first rate colleges, are willing to pay an adequate level of taxation, and no sales tax so you don’t face that obstacle.
you need to change more than tax statutes. You are also going to have to address the home rule city issue. I think what David is after is a single collector and single tax base like a state like Michigan has. To do that the home rule cities have to go away. Then you have to force the counties and the statutory cities to have the same tax base as the state. Right now they have options on about a dozen different items. The reason is during the Owens days they (the counties and cities) started really complaining that the general assembly was giving away the farm with the exemptions so they started giving the counties and statutory cities an opt in on the exemptions.
There is actually an authorized vendor for a data base that the retailer that uses it is held harmless if it tells him the wrong jurisdictions.
David, did you or your firm offer written comments on the proposed software regulations? Did you or your firm attend the hearing on the software regulations? If not, don’t bitch about the results.
That might be the way they do things in Michigan. But to achieve David’s ease of sales tax collection, we’d also have to do away with the stadium district, SCFD and RTD. And tell cities like Lakewood and Fort Collins they can’t raise their sales tax like both did with voter approval in the past couple years. That’s a lot to throw out to make things easier for David’s company.
Because I supported the concept of companies like mine paying their fair share. Because we had never had to interact with the Department of Revenue we didn’t even know there were all these tax districts or that DoR was incompetent.
I’m not trying to get the tax eliminated, I’m trying to get it set up so it’s straightforward, simple, and competently administered.
And yes I did make a mistake in assuming that the state would implement this competently and in a straightforward manner. Call this my rude awakening to understanding why so many business owners consider the state the enemy.
David, it’s your customers that are paying the fair share. Your company, from what I understand, is unduly burdened having to calculate that share, but what you’re doing is collecting the tax from your customers and passing it on.
And forgive me, but
does not inspire much sympathy. That’s a shocking ignorance of how Colorado municipalities, counties and special districts have operated basically forever. You assumed the implementation would be simple based on a fundamental misunderstanding of how complex sales tax is? … I’m not sure the state is to blame for that.
I’ve never worked for a company that had to collect sales tax. So I never really thought about it. Yes it was a surprise as to me how complex it was. I don’t know if it’s reasonable to assume people who have not paid before should still have known how onerous the effort is.
And you’re right that we just pass on the tax and our cost is the overhead but not the tax. But that overhead is substantial.
Food, Clothing, and Shelter should not be taxed. These things are not optional purchase for anyone.
Here are a couple of things that I think would go a long way to solving some of the problems: property tax on non-primary housing and the gas tax.
It sounds like the DU study hints that the gas tax is way behind. A new format is needed, either a percentage of price, like sales tax, or a tax tied to an index so it will go up and down (w/ state GDP?).
Property taxes need to be re-examined in general. Gallagher has tied up the residential property taxes so they go down over time which has hurt local entities. That kind of long-term problem needs to be addressed. But I would also urge detangling second homes from primary ones for property tax. The rate they would receive would have to be decided but it is difficult for the state to have those second homes taxed at such a low rate.
“even with the solid economic recovery that is projected to take place, Colorado can’t grow itself out of it’s revenue problems.”
It is getting ever more apparent that Colorado and the United States cannot “grow” their way to a better economy and a sound financial footing.
In the last decade, the United States added 27 million people and Colorado 700,000 people. Are we better off as a nation then we were 10 years ago. Absolutely not. We have a growing number of people in poverty, a growing gap between the haves and have nots, huge infrastructure deficits, a huge federal deficitn, etc. Our quality of life is going down and our environment is increasingly under stress.
It is time to take a serious look at our addiction to population and economic growth and come up with a new model. One that would stabilize our population and allow a more “steady state economy” not dependent on endless, unsustainable, exponential growth.