centre{source}

The tax is a bad idea, and I hadn't even considered one of the problems Holland notes. Business property is on a depreciation schedule, but the depreciation schedule for software would have to be ridiculously short to reflect the software's real value.

[From Jeff Constantine, President of NTC on 01/23/06]

There was good news and a reminder of a difficult truth during this morning's hearing before the State Board of Equalization on a proposal to make application software uniformly taxable as personal property.

On the one hand, soon after the hearing convened, Thomas Fleming, a member of the staff of the Office of the Comptroller of the Treasury, advised nearly 70 executives assembled for the hearing on software and other issues that the State Board of Equalization had resolved that it "not ready to go forward" with its software-tax proposal.

Instead, the Board's staff will do more homework, including reviewing briefs submitted by attorneys and other parties today, studying assessment practices in Tennessee jurisdictions and in other states, and perhaps searching for estimates of the economic impact of taxing applications software as personal property.

So, for the moment, the basis for your tax bill will remain unchanged.

However, the comments of executives who rose to speak against the proposed tax change made vividly clear how vulnerable Tennessee businesses are to competition from other states and from other nations.

Several speakers stressed that if the State sought to tax all applications software as personal property, some businesses would feel forced by cost pressures to move whole companies or computer operations to other states, or to other nations.

Wayne Sharber, vice president, Tennessee Chamber of Commerce & Industry, told the Board that the state Chamber believes the tax proposal would cost Tennessee businesses in excess of $100 million, annually.

Charlie Trost, who serves as counsel to an ad hoc coalition of businesses (including HCA, IP, and others) that is addressing this matter, announced he has filed a brief with the Board on these issues. Stressing the gravity of these issues, Trost warned that the software proposal would likely result in the erosion of the tax base, with Tennessee potentially losing both hardware and software employment and investment. In addition, local attorney Paul Krivacka, explaining he represents a Nashville healthcare company in a software-tax related matter, argued that the proposal was imprudent and would place Tennessee at a disadvantage to most other states.

I found particularly compelling remarks by Jim Marks, who stressed he was speaking as a concerned citizen, and identifying himself as an executive with NMG Advisers, (an NTC Member company). In addition to his argument that the rapid obsolescence of software makes it more a cost of doing business than an "investment," he noted the complexity of the issue, offering as examples questions about how inhouse software might be treated, versus outsourced programming costs, such as Tennessee businesses employing ASP software and services from outside Tennessee.


In the face of such complexities and in consideration of U.S. competitiveness, several speakers urged that the tax proposal not be merely studied further, but withdrawn.

In addition, legal briefs and comments filed today address a number of issues, perhaps most important among them fundamental questions regarding whether the State Board of Equalization may promulgate a rule regarding tangible personal property, or whether that would represent an unconstitutional circumventing of the General Assembly, where a business coalition of software consumers says such taxation authority exclusively resides.

We will continue to follow these issues, very closely, and will report to you, as warranted. Meanwhile, this issue serves to highlight how pervasive technology issues have become. We'll be giving further thought to this, as I'm sure you will. Please share your thoughts with me, at any time. Please write me here.

Sincerely,


Jeff Costantine
President

The Tennessean Posted An Article:
----------------------------
By BUSH BERNARD
Staff Writer

Published: Monday, 01/23/06 THE TENNESSEAN

Businesses of every size and nature would be affected by a proposed change in state tax rules that would make software subject to property tax in Tennessee — a move that critics say could backfire and end up costing Tennessee new jobs.

The change is part of a package designed to clarify property tax assessment rules last updated in 1988. It is scheduled be debated by the state's tax equalization board today.

Business organizations have come out in force against the plan, saying it would cost many companies tens of thousands of dollars and weaken the state's economic development efforts.

"It would have a significant detrimental effect on any of the big-headquarters companies here that have sophisticated custom software associated with running their business," said James Weaver, an attorney and vice chairman of government relations and community improvement for the Nashville Area Chamber of Commerce.

"It's going to have an immediate detrimental effect," Weaver said.

The State Board of Equalization, which sets the rules followed by property assessors in all 95 counties, will hold its hearing on the rule change starting at 10:30 a.m. today.

"The common theme to the changes is clarity, to clarify situations that may be ambiguous under present law," Kelsie Jones, the board's executive secretary, said.

Current state law is silent on how computer software should be classified for property tax purposes. But a 1976 Tennessee Supreme Court ruling in a sales tax dispute classified software as intangible property — something that generally isn't subjected to property taxes.

Computers and other hardware, such as printers, are taxed under state law. Some assessors also have been taxing operating systems and other applications that come bundled with computers when they're sold. But even then, the board is operating without specific guidance from any state law, said Charles Trost, an attorney with Waller Lansden Dortch & Davis in Nashville, who specializes in corporate taxes.

"My position is that the State Board of Equalization cannot unilaterally decide that software is tangible personal property when the state Supreme Court has said it is intangible," said Trost, who represents several large corporations.

"There's no such statute on the books, and until there is, you don't have the authority to tax it," Trost said.

Area property assessors are hoping for a decision, one way or the other.

"We are pushing for some clarification because the statutes are sort of vague," Dean Lewis, appraisal service manager for Davidson County's assessor's office, said.

"(The law) includes computers and peripherals. Other states have labored over this as well, so we're not unique in that respect."

Rutherford Assessor John Barbee said he's not sure what the impact might be on the tax rolls, but the issue needs to be settled.

"I'd like for it to be settled one way or the other so we'll know the right way to proceed," Barbee said.

It's unclear how much money the rule change could add to the state's coffers or exactly how big a hit it would be on businesses. The cost would vary office by office, but there's a consensus among tax professionals that such a software tax would be a heavy burden on corporations.

"It certainly would affect a broad range of industries as well as every individual business," said Carolyn Schott, an attorney who specializes on tax issues for Baker, Donelson, Bearman, Caldwell & Berkowitz in Nashville.

"Almost every business today is running some kind of application software," she said. "Sophisticated businesses or large industries are running hundreds of application software programs."

The new property tax would cover anything from word processing and document filing systems to complex software running manufacturing operations.

"It could easily cost a company $40,000 or $50,000 a year," said Larry Hyatt, a Brentwood accountant. "Some would (pay) substantially more than that." Big manufacturers would be especially hard hit, with some of their software taxes topping $1 million a year, Hyatt said.

"Right now, we're losing jobs every week to places like Mexico," Hyatt said. "Put on the executive board table, an additional $200,000 or $300,000 per year tax bill, and you've got the facilities in Mexico that you can move the jobs to, that becomes an awful easy decision, and Tennessee loses the jobs."

Jones said the hearing is designed for the board to get input, and the proposed rule as written isn't necessarily how the measure will end up.

"You can always do less than what you propose, but you can't do more than what you propose without having another hearing," Jones said. "Our practice is to propose all that may be considered whether or not you actually end up there."

"Basically, we said if we're going to talk about software, there's a potential that all software could end up taxable,' he said.

"All software is treated as tangible personal property for sales tax purposes so we could end up there. But we may not. We're going to listen to what people have to say."

State Rep. Gerald McCormick, R-Chattanooga, said he thinks the board might be overstepping its authority. He has filed a bill to exempt computer software from property taxes, saying such a tax would put Tennessee at an economic disadvantage when compared with most other states.

"I think that something that important should be debated in the legislature rather than just being passed down as a rule from the State Board of Equalization," McCormick said.

"It would put us at a crippling competitive disadvantage, particularly when it comes to research-and-development-type projects" and jobs.

Businesses are watching the issue closely.

The tax could have a big impact on Nashville tiremaker Bridgestone Americas Holding Inc., for instance, which uses hundreds of different programs for computers at its headquarters in Nashville and its factories in La Vergne, Morrison, Clarksville, Dickson and Dyersburg, Bridgestone spokesman Dan MacDonald said.

"We haven't had a chance to fully analyze the proposal, but anything that makes the business climate in Tennessee less competitive is something that should be scrutinized very thoroughly before being implemented."


Published: Monday, 01/23/06

Text of proposed rule
Though it seems simple, a proposed rule that adds one sentence to the end of the state's definition of tangible personal property for which property taxes can be levied also could add tens of thousands of dollars or more to the cost of doing business in Tennessee.
Here's the definition with the proposed change in bold:
"Tangible personal property," as defined by T.C.A. §67-5-501(12), includ-es personal property such as goods, chattels, and other articles of value which are capable of manual or physical possession, and certain machinery and equipment, separate and apart from any real property, and whose value is intrinsic to the article itself. Tangible personal property includes computer software.

The Nashville Post also commented on the subject:
------------------
January 20, 2006

Hard Feelings About Software Taxation

By E. Thomas Wood

You may not have heard about it, but a battle royal of state and corporate interests has been scheduled to play out in Nashville on Monday morning, January 23.

Each side's troops have been readying themselves for the conflict since last November. But now it seems that one of the armies may opt for a swift, strategic retreat.

The issue dividing these forces is whether business application software ought to be taxed as tangible personal property. The State Board of Equalization says it's about time we call an asset an asset and tax it for what it is. To many of the largest corporations in Tennessee, them's fightin' words.

After it proposed a rule change in late November on how auditors would treat software in computing property tax, the Board of Equalization soon became aware that it faced powerful adversaries. The Board has changed the site of Monday's 10:30 hearing to a larger conference room at the James K. Polk State Office Building in anticipation of the turnout that this policy proposal might generate.

This afternoon, however, NashvillePost.com has heard that there is a strong likelihood that Tennessee Comptroller John Morgan will make the Board drop the controversial idea.

Morgan himself cannot be reached at the moment, but Kelsie E. Jones, executive director of the Board, insists he has "not heard anything of that kind." Monday's meeting will go ahead -- reportedly with the participation of several corporate representatives who will be flying in from out of town.

"It's safe to say that we won't know exactly what we're going to do until after Monday," Jones said in an interview. "We're going to hear a lot of comments." Interested parties were invited to submit comments in writing, he said, but "if they choose to come from parts far away, that's their decision."

At least two groups of businesses have made their feelings known in briefs submitted to the Board.

Charles A. Trost, an attorney at Waller Lansden Dortch & Davis PLLC in Nashville, wrote to the Board on behalf of a number of unnamed "large Tennessee-based companies with significant investments in application software which they use in their businesses." Trost expressed surprise that the notion of taxing application software as property would arise again after the Board's lawyers and at least one administrative law judge had ruled against the idea in the past. Citing case law and the state's constitution, Trost argued that "the proposed rule would be invalid as exceeding the scope of the legislative authority granted to the Board."

Tax lawyer Paul D. Krivacka, of Adams and Reese LLP in Nashville, represents "a coalition of certain healthcare, manufacturing and telecommunications taxpayers" before the Board. His comments touch on not only the legal underpinnings of the proposed tax standard, but also the "incongruity between the proposed rule and the State of Tennessee's goal of encouraging and supporting high-tech industries in the state."

Both experts assert that only the State Legislature has the power to declare application software taxable. Last week, Rep. Gerald McCormick (R-Chattanooga) filed a bill to declare exactly the opposite. House Bill 2472 would provide that "computer software shall not be considered tangible personal property." McCormick was not available late today to discuss the bill.

Jones portrayed the Board's proposal as an effort to make auditing standards consistent across the state. "There have been differing pronouncements from the state over the years as to how software should be assessed," Jones said. "In part because of that, there are differences in how the state's 95 counties treat application software. The motivation for all the changes proposed is to provide greater clarity."

Jones said the move is not intended to raise revenue for the state, but that nevertheless "there would be an increase in revenue." Just how much is hard to estimate, he said. "We're asking local assessors right now to tell us how they have been treating this issue and what the impact of a change might be."

Additional taxs will insure that we move our company out of Tennessee to another state. It is enough that taxes are paid on equipment I have owned, own, and purchase over the year. I also pay taxes on paper I purchase for the printer. The funny thing is I don't even have a client in this state but I pay state and local taxes anyways. As a small company that provides customized software and system development the tax would make working in TN impossible.

While researching, I ran into brief mentions about a Software Property tax in other states. Here are 4 states that appear to have Software Property Taxes.

Washington - http://www.choosewashington.com/state_data/Incentives.asp
Oregon - http://www.town.oregon.wi.us/agendas/agendatownboard12-6-05.htm
California - http://www.rowbotham.com/articles/finepoints.html
Colorado - http://www.coloradosprings.org/files/2.1.3/2.1.3.3.pdf#search='software%20property%20tax'