HOUSE BILL REPORT

                  HB 1376

             As Reported By House Committee on:

                           Revenue

Title:  An act relating to the taxation of computer software.

Brief Description:  Classifying computer software for purposes of taxation.

Sponsor(s):  Representatives Wang, Holland, Fraser, Silver, Phillips, Brumsickle, Wynne, Horn, Pruitt, Orr, Sprenkle, Hine and Brekke; by request of Software Study Committee.

Brief History:

  Reported by House Committee on:

Revenue, January 29, 1991, DP.

HOUSE COMMITTEE ON

REVENUE

Majority Report:  Do pass.  Signed by 14 members:  Representatives Wang, Chair; Fraser, Vice Chair; Holland, Ranking Minority Member; Wynne, Assistant Ranking Minority Member; Appelwick; Brumsickle; Day; Leonard; Morris; Morton; Phillips; Rust; Silver; and Van Luven. 

Staff:  Rick Peterson (786-7150).

Background:  All property, both real and personal, is subject to property taxation unless specifically exempted.  Personal property includes both tangible and intangible property.

Tangible property has a physical existence, for example, desks, file cabinets and equipment.  Intangible property does not have a physical presence, e.g. copyrights and patents.  Some intangible property is exempted, such as money, mortgages, certificates of deposits and judgments.  Computer software is generally considered to be intangible property.

In 1989 the State Board of Tax Appeals ruled that computer software was taxable because it was not on the list of exempt intangible property.

In 1990, SSB 6859 directed the county assessors to list and assess computer software for 1991 taxes in the same manner and extent as they did in 1989.  The Department of Revenue was directed to coordinate a study of the property taxation of computer software.  Included in the study team were representatives of government and business.

The results of the study were published in a report containing recommendations for the taxation of computer software.  The recommendations were: embedded software should be taxed, custom software should be exempt, master copies of software should be exempt, the user of software should be taxed rather than the licensor, and canned software should be taxed but depreciated over a two year period.

Summary of Bill:  Custom software is exempt from property tax.   Master or golden copies of software are exempt from property tax.  Modifications to canned software are exempt from property tax.  Embedded software is taxed as part of the computer system or machinery or equipment containing the embedded software.  Taxable computer software, except embedded software, is taxed in the first year at 100 percent of acquisition cost and in second year at 50 percent, and at zero thereafter.

County assessors are directed to list and assess computer software for 1992 taxes in the same manner and extent as they did in 1989. 

Fiscal Note:  Requested January 30, 1991.

Effective Date:  Effective for property taxes to be collected in 1993.

Testimony For:  Custom computer software is difficult to value and exempted by other states; canned software depreciates very rapidly.

Testimony Against:  None.

Witnesses:  In favor:  Sandi Swarthout, Department of Revenue; Steve Seward, Chair, Software Study Committee; Ed Tveden, Citizens for Fair Taxes; Enid Layes, Association of Washington Business; and Bill Neukom, Microsoft.