Washington state considers 10% tax on ‘custom software’ development

Washington state considers 10% tax on ‘custom software’ development

“The largest policy problem for me, however, remains the fact that it is not technology neutral and would result in a direct disincentive (in the form of 10% higher costs for not doing so) for a company … to use ‘insource development resources’ as opposed to ‘outsource development resources.’  What does this mean? It means that a 5 person team of entrepreneurs building a cool custom software suite, or a group of system integrators, would face a 10% tax on their services while keeping the exact same project in-house would not be taxed. It would be a massive blow to the entrepreneurial community in our state. ”


While I’m no fan of the tax, I don’t see it as quite the dis-incentive to entreprenurialism as he claims.  This bill seems to only impact those doing CUSTOM work for a customer.  If they’re developing a retail product to be marketed to many customers, they won’t be affected.  Custom software work usually is exclusively licensed to that one company….BUT…

I find the interesting point that he makes a big deal that this bill will likely encourage big companies to do in-house development instead of out-sourcing it.  While I think this would be mostly good for employees as in-house jobs are usually full-time positions with better benefits and more stable employment; I do see that it would likely hurt a community’s goal of getting a seed company in and then developing an robust ecosystem around that business.  One that would encourage an ecosystem around that industry – instead of one large mass in one single company.  This bill would likely encourage more monolithic companies with less support companies around it.  And that WOULD be bad for a community in the long run in two ways.  First, if the big seed company failed or moved out, there would be nothing else for the workers to do but move too (ala company mining towns of Appalachia).  Secondly (and probably closer to this politician’s heart), is that it also put the city/government in a tough negotiating spot with said monolithic company who could push their weight around.  I believe he’s thinking very much of Boeing outside of Seattle.  They asked for some big tax breaks, then shopped around till they got them elsewhere.  Seattle couldn’t/wouldn’t match the offer and they moved.   Puts city officials in a terrible spot if your economy is a one-trick pony, and if you lose that, you lose everything.  It would be far better to have a big, diversified portfolio of support companies around your seed that could re-direct to other work, or even create new industries, if the seed company left.  It also has the nice effect of giving the government more leverage if a big company threatened to take their toys and go home.

But even with this greater diversification of support industries, I don’t think you could avoid a hit like Detroit and surrounding areas are seeing.  When a whole industry goes south – it’s necessarily going to drag the others with it.  The black hole’s even horizon is just too big and it’s very hard to switch a profitable business model from machine tools that stamp car parts to stamping bread tins.  Still, it’s better than those old single-company towns and the abuses there.

Guess company towns aren’t quit a thing of the past at all.

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