Thursday, February 25, 2010

Budget Balancing Bills

The Senate this week will pass 30 some bills to bring the budget into balance for the current fiscal year.

Most of the bills are just minor adjustments to each department of state government that reduces spending to reflect the money saved by furloughing state employees.

There are no bills that truly seek to reform government by controling the growth of spending on Medicaid or revamping our educational system into something that works better, smarter and faster.

Mostly business as usual and a continued lack of leadership during these tough times by the Governor and the majority party.

There are a couple of bills that are really offensive: one that transfers $87 million in cash funds to the general fund – a common occurrence during tough economic times and one that establishes a new bed tax on nursing homes to raise money that will be used to seek a match of federal funds for those same nursing homes.

The cash fund raid takes money from a dozen other areas of state government, most of the $87 million comes from severance taxes on oil, gas and coal. The same industries demonized by many of the Democrats voting to raid the funds. How ironic.

The nursing home bed tax will be used to offset a cut in funding to the same nursing homes. The money raised from the bed tax will be sent right back to the nursing homes so that the state will qualify for a federal match in funding for those nursing homes. Man, that’s creative!

I’ll end up voting for the bills that really reduce spending even though I am disappointed that no real creative thinking is going into solving the budget problem by reforming government in a way that permanently reduces spending.

I will vote against the cash fund raids and nursing home bed tax.

Tuesday, February 23, 2010

common sense water legislation?

The Senate passed SB 165 35-0 this week. Don’t let anyone tell you that Democrats and Republicans can’t work together to solve problems.

SB 165 is a bill that deals with the water that comes up with natural gas in natural gas wells. The water is called produced water and except for produced water from a separate kind of natural gas wells, coal bed methane wells, this produced water will not be regulated by the state in most cases.

Here’s what happened: some senior water rights holders filed a suit against gas producers from coal bed methane (CBM) wells saying that the water that was pumped up with the natural gas was tributary to a river and since that water was taken out of the ground and moved somewhere else, it didn’t seep out into the river and the senior water rights holders didn’t get as much water as they would have so they were “injured”. The Supreme Court agreed with the water rights holders and the gas companies were told they had to be regulated and would have to replace the water they took. This decision threw every natural gas well that pumps up water into jeopardy. Would all gas wells have to replace that produced water? There are tens of thousands of them and if so, it was going to be very expensive.

Everyone went to work to prove that all or almost all of the non-CBM wells were non-tributary, meaning that the water that was pumped up with the gas would never enter into our river or surface water network. Almost all of the water used for agriculture and drinking comes from this surface water network, rivers and shallow wells, so protecting it is a big deal.

After spending millions on engineers, the state and the gas companies agreed that the water that is with the gas is non-tributary in almost all cases.

As a side note, you should know that water lawyers who make their living suing people for injuring senior water rights holders hate this decision. They might have completely pure motives and think that the water that is 2000-10,000 feet deep is part of the surface water system or they might just want to retain the ability to make a boat load of money suing natural gas corporations. Could go either way.

Then the state, which means Governor Ritter’s Department of Natural Resources, did something really unusual. They decided to reward natural gas companies who use this produced water to offset the use of other surface water.

That’s right; Governor Ritter actually did something good for the oil and gas industry.

Some of the natural gas companies effectively recycle this produced water and offset the need for water from another source, mainly surface water. Doing this reduces the amount of water they would use from the river systems, it reduces truck traffic that would be needed to haul the water and it’s responsible. Now the state is actually rewarding companies for doing this.

The only case in which this produced water will be regulated by the state is when the water is used for some other purpose; in that case, the use will be treated just like every other instance where non-tributary water is put to beneficial use.

I worked a lot behind the scenes on this issue. It is really nice to see everyone’s efforts rewarded with common sense legislation.

Sunday, February 14, 2010

Software/Internet tax exchange

This exchange between David Thielan, who posts on many liberal blogs, is pretty informative, so I’m compiling his writing and my answers to the points he raises. It’s long, but I think you’ll enjoy it.

David is a really smart liberal who does a good job writing from the left. He’s often wrong, but that’s redundant as I already told you he’s a liberal and, therefore, just doesn’t understand human nature.

This is what he wrote on ColoradoPols – don’t go there as it is just a mouthpiece for SEIU, bought and paid for.

Sales tax on software - oncoming train wreck
Sat Feb 13, 2010 at 15:12:24 PM MST

First off, I think we should bring in most tax revenues through a progressive income tax and limit sales tax to cases where we want to reduce consumption (cigarette taxes) or the tax goes to direct use of the good (gasoline tax). Second, if we are going to have sales taxes (and we are), then I don't think anyone should get a free ride - so I support the concept of taxing software sales.
With that said, this impacts me personally as my company sells software. I'm not concerned with adding a tax to the sale as our customers are not price sensitive. What I am concerned with is the hassle as I don't want to have to have employees spend a ton of time administering this, and I don't want to force out customers to spend a lot of time telling us where they are using the software we sell them. We are all very hassle sensitive.

DavidThi808 :: Sales tax on software - oncoming train wreck

Under the proposed software sales tax, can the state tell me how to tax the sale? The following are all real cases that my company has seen, either selling or buying software.
1. In the car (as a passenger) I buy a program for my iPhone. I make the purchase in Boulder but by the time it's downloaded we are in Denver. And I first use it South of Denver on our way to Colorado Springs. Which City/County gets the sales tax?
2. My company purchased a site license to a program used to create our documentation. It is used by 2 employees, one in Boulder and one in New Hampshire. Both downloaded a copy. Neither knows which one used it first. And at the time of purchase they would not have been able to predict who would use it first. Note that we did not buy 2 copies - we bought a single site license. Which state gets the sales tax.
3. We are an IBM partner. One option we have is to pay $795.00/year and we then get all IBM software for free. One year we never used any software - was that still a sale as it was never installed & run on a computer in Colorado? In this case would we pay the sales tax the first time we actually get a free copy - and in that case only if the first use was in Colorado?
4. We sell to customers in Colorado where at the time of sale they do not know where the software will first be installed. In the case of one 65K sales I asked and they think it was installed first in Colorado on a virtual machine, but then shipped to China to run on servers there. So it was never run in Colorado. Is it where first installed or first run?
5. We sell floating developer licenses. We have a customer where they have some developers here in Colorado and the rest in China. Sometimes all the licenses are used by developers in Colorado, sometimes all in China, and usually it's about 2/3 China and 1/3 here. And at the time of purchase they have no way of knowing who will use it first.
6. Potential customers download our software, install it, and try it. When they decide to purchase we then ship them a new license key to replace the demo key. So upon purchase they are not downloading or installing any software, just a key. Is that a software sale?
7. We have a customer that has a large presence in Boulder. We sold to a group in New Jersey, to be used in Poland, and paid for out of Chicago. But the Boulder facility may (they aren't sure) use the system with our software, but probably running on servers in New Jersey.
8. We have customers who put our software on Amazon's cloud system. They don't know what state the software first runs on, not does Amazon. A customer in England could have our software first running in Colorado while one in Colorado may never have it running here.
9. We have customers pay us to add specific functionality to our program. So it's professional services in that they are paying us to do something specific. But the end results is that we ship them a new version of our commercial product as the feature is added to the commercial product. Is that a software sale or professional services?
10. We sell annual support & updates to our customers. This is a combined deal where they get both for the price. As the updates is the new version of the commercial software, is that taxable? And if so, what percentage of the support & updates as the support part is not software?
11. If a customer downloads our software from a server in Asia, does it count as a sale from Colorado?
12. We use SalesForce for our salespeople. Their software runs on servers in California and we access it via our web browsers. As the software does not get installed here, do we owe Colorado taxes on that purchase? What if they use JavaScript in their web pages so that it then does run code in our browser from their server?
13. If I buy commercially available web page templates, is that software? It's html which are page layout commands but it is not a program that runs.
14. There are electronic books with embedded flash in them - is that software?
15. Multiple Kindle books can be tied to the same account so all members of a family can read a book purchased once. If my daughter in Chicago gets a Kindle we'll tie her to our account. If I buy a book that she reads first - which state gets the sales tax? What if I buy it for her?
Before making this law, you need to have clear answers for the above. We have sales prices on the order of 50K - 250K so the Department of Revenue is going to want any money due to it. But if the above questions do not have a clear answer, we will be left waiting in most (not some - most) cases to have DoR determine what is owed to who.
The other thing is I see this creating a barrier to closing a sale - and that will harm us (and other Colorado companies). If we tell a potential customer they need to break out their purchase and identify which components will first be used in Colorado and where - that's the kind of requirement that will always slow a sale. And will sometimes lose one. (Needless to say, if we lose a 250K deal, that's one less person we hire.)
On top of that, we have to determine what taxing districts within the state a given sale falls in. How do we determine if a Boulder address is within the city limits? In addition, this guarantees we will not open a sales office in DTC (something we have considered) because the last thing we need is a second jurisdiction we have to figure out local taxes for.
Keep in mind we're a small company. There are literally thousands of others like us here in Colorado. We are all coming out of the recession and trying to focus all of our time and effort and growing our companies (and that adds jobs). You need to give as a simple straightforward way to determine the correct sales tax.
And to double down on this clusterfuck, there is the proposal to require companies in other states to report to Colorado based on sales. Can Colorado even tell them the criteria to determine what is included? (I bought a book on my Kindle when I was in Arizona, read it in Arizona, and deleted it when done - still in Arizona. The book was never on my system in Colorado. How can Amazon track that?)
Senator Brophy has a good post on this - including the little issue of the state learning what you are buying (that inflatable sheep was a gag gift - I swear!).
I understand the need to increase revenues. I agree that it is fair for software companies to pay their fair share. But software is not buying a physical thing at a physical location. It is the purchase of an amorphous object that can then first be used in multiple locations.
The legislature needs to get this figured out before dumping it on us. Otherwise it will cost Colorado companies sales (and jobs).

Here is my email response to the 15 questions David raised in his piece:

Ok, I'll answer your questions as I can.
1. it’s state sales tax only, so it doesn’t matter where you are what matters is that you are a resident of Colorado. Now, if you were in Hawaii when you bought it, you’d have an argument, but DOR would still expect you to pay.
2. The cost is apportioned between all employees who use the software and those that are stationed in Colorado would be charged for their portion. First or last to use doesn’t matter at all. Really, now tell me that that doesn’t encourage jobs to be located elsewhere.
3. This is where it gets interesting and the idea is to enforce this tax by audit anyway so you are going to get hassled. This type of contract might be a service contract and not taxed, but if too many start doing that, I bet they change the rules.
4. again, comes back to employees who use it who are stationed in Colorado.
5. same as 2 and 4.
6. yes. Just shut up and pay dang it.
7. just like 2 and 4 and the audit will determine this.
8. employee location, again.
9. no tax on services and there is a way for the auditors to determine if the software is mostly customized; if it is, no tax at least on the portion that isn’t “off the shelf”.
10. similar to #9. if the upgrade is mostly off the shelf, tax will be collected. That portion that is customized will be tax free for now.
11. if the customer is in Colorado – remember, this is a tax on consumers, be they corporate or individual, not on your company.
12. all that matters is where your employees are located and the audit will determine that.
13. yes
14. most likely, yes, they will now be considered “tangible personal property”. Gotta love these Dems don’t ya?
15. if you buy it, you will be responsible for the sales tax, but that is under 1193, not 1192.
16. don’t forget that every personal download of software is subject to sales tax now, too. This doesn’t apply only to businesses, but to individuals paying for any download. The chance of an individual getting audited is very slim, but it exists and since I don’t trust government, I assume that enforcement will be selective – can you say political enemy beware?

Are you thoroughly pissed yet? You should be. This is non-sense. I adamantly oppose your progressive income tax as it punishes work, savings and investment, but I do support wholesale tax reform that takes into account modern technology. I am beginning to believe that we really can’t evenly and effectively tax anything that can be bought on the Net. I like our mix of low tax rates in Colorado on multiple events/items, property, sales and income. I think we should swap out our sales tax on items for a sales tax on services instead. I also oppose corporate income in general and would get rid of it.


Friday, February 12, 2010

Candy and Soda Tax

In the desperate search find someone to tax who won’t hold it against them, the Democrats decided to add sales tax to candy and soda. I guess they decided to write off the little kid vote in 2010.

HB10-1191 adds sales tax to sweetened drinks that have less than 50% fruit juice, and unrefrigerated candy that doesn’t have flour in it.

The cost of a twelve pack of coke or pepsi will go up 2.9%.

Representatives of both companies explained that their experience shows that a price increase of this much will cause a corresponding drop in consumption of 1.7% to 2.8%. They suggested that since their sales in Colorado have been under pressure since the 90’s and especially since the start of the recession, this bill will likely lead to lost jobs in Colorado as the companies can only stand so much damage to their bottom line. Tax increases have consequences.

The candy tax is especially goofy, as Kit Kat candy bars are not considered candy, they have flour in them, but of course Hershey candy bars are taxed. Licorice isn’t taxed, no kidding, check the label, there is flour in licorice, but sweet tarts are taxed.

It really shows desperation to raise revenue instead of doing the hard work of reforming Medicaid and our education system to balance the budget.

In economic terms, this bill sucks $18 million a year out of the private sector and plows that money into state government, meaning that investment and savings will be reduced and poor choices will be continued by government.

This bill is part of the “dirty dozen” tax increases offered by the Democrats and Governor Ritter this year. As the Pueblo Chieftain editorialized today, elections have consequences. Do not forget who has done this to you.

Tuesday, February 9, 2010

Download tax

HB10-1192 will tax software downloads in Colorado. That’s right; you will now owe sales tax on your downloaded software. You already pay sales tax on software if you buy it off the shelf, but now, thanks to Gov Ritter and the Dems you’ll owe it when you purchase and download software on the Internet.

There is some argument over whether or not this is a brand new tax, but there is no argument that this tax hasn’t been on the books since 2006. Now they are going to start trying to collect it. You should be mad.

Every time you download new anti-virus software. Every time you buy that new killer app for your Iphone. You will owe some sales tax to the state. It doesn’t matter that the state has no business in your computer and no part in the transaction. They want their money from you.

Businesses are the real target of this tax. Sometimes businesses buy really expensive software and the state wants a cut of the action. Doesn’t matter that the download cost the state no services; the state wants their money.

This part adds up to some real money. Some businesses are just going to say no. They will locate elsewhere. These companies are very mobile; you can’t just add a tax like this and think that there will be no consequences. They will move; other companies will say thanks but no thanks, we’ll move to Nevada.

In either case, it is bad for Colorado.

We need to encourage businesses to locate here, not chase them out. This is another of the colossally bad ideas put forth this session.

Monday, February 8, 2010

Taxing Farmers and Ranchers

Among the myriad of tax increases proposed by the Democrats this year is a bill to add sales tax to pesticide purchases and medicine purchases for livestock.

When this bill passes, and it will pass, Colorado will be one of only six states to charge farmers and ranchers sales tax for the inputs they use to produce food.

What’s interesting is that the law will create an incentive to purchase your pesticides and medicine online or from an out of state retailer. Yes, I know that Colorado residents are supposed to pay use tax in place of the sales tax when they do that, but the reality is that most people won’t. At least they won’t until they think the chance of being audited is high. Trust me; I know these guys and they don’t like paying taxes.

Taxes on production inputs do not exist in any other industry in Colorado, but now agriculture will face that type of tax. And ag is an industry that can’t pass costs on; we compete in a world market and are price takers. We accept the price offered by the buyer, and when competing farms located in Kansas and Nebraska don’t have the same costs it makes Colorado farmers less competitive and gives them an incentive to not pay these taxes.

So what does this new tax mean in human terms? Well, if you are a full time farmer this bill will likely take $2000 to $6000 out of your pocket.

That’s a lot of money.

Sunday, February 7, 2010

Taxing the Internet

The tax collectors and liberals in Colorado have dreamed up a scheme to tax the Internet.

HB10-1193 seeks to force Internet retailers, like Amazon and Ebay, to collect sales tax from Colorado customers.

The problem is the Supreme Court, in Quill v. North Dakota, says that they can’t make them collect the sales tax, so someone came up a new way to use the regulatory authority of the state to make Amazon and Co so miserable that they’d say “uncle” and just start collecting the sales tax for Colorado “voluntarily”.

Here’s how the regulatory proposal works:
Internet retailers will have to tell their customers every time something is bought online that the customer owes “use” tax to the State of Colorado. Use tax, little did I know, is owed on any item purchased for which sales tax is applicable but not collected. No, really. Failure to make the notification results in a $5 fine per occurrence.
Internet retailers will have to notify customers once a year by mail what their annual purchases were and that use tax was owed on those purchases.
And the pièce de résistance is that the Internet retailer will have to submit to the State of Colorado a list of everything that you bought online! YIKES!

That’s right, Big Brother, aka Dept of Revenue, wants a list of everything that you have purchased on line so they can send you the bill for sales tax.

They will want a list of all the books you bought, all the movies you bought, Valentines presents, and you name it. It just gives me the shivers.

Remember how the ACLU howled when the Patriot Act sought to access library records with subpoenas? Haven’t heard from them on this one yet.

Taxing the Internet is really the Holy Grail of tax and spend liberals. You are going to have to pay the bill and lose the liberty.

Saturday, February 6, 2010

PERA solution

The Colorado Public Employee Retirement Association fund took a beating in 2008 losing nearly 30% of their value in one year and taking the funded ratio of assets to liabilities to near 50%.

This is a huge problem. The fund is $30 billion in the red and facing the real possibility of crossing a tipping point from which there will be no recovery. If things don’t change soon, a tipping point will be reached in 4 – 6 years, followed by a fund that is completely out of money in another ten years.

If that happens, either retirees will get no money or the state will have to figure out how to pay the current equivalent of $2.85 billion a year in benefits out of the general fund – the money that funds K-12, Higher Ed, Corrections, etc. $2.85 billion represents 40% of the general fund, in other words, we’ll be broke.

Fortunately, a solution was crafted the put the fund on track for solvency in 30 years without increasing taxes.

The solution is hard to take; it reduces benefits and requires the state and employees to put more cash into the fund. Basically no one likes it, but most understand that it’s something that has to be done.

I wrote a response some of the critics of the solution with Sen Penry in the Post.

We didn’t respond to the PERA members who are critical of the reduction in benefits.

I understand that they won’t like the cost of living adjustment (COLA) increases being cut from 3.5% to 2%. I wouldn’t either, but I suspect that they’d like a bankrupt fund a lot less. As the United retirees who have seen their retirement benefit cut to a fraction of what it was; a real fraction, not a reduction in the rate of growth, but checks that are actually cut by more than half of what they were before United’s fund bankruptcy.

Finally, it is important for retirees to remember that a future legislature can increase COLA’s if warranted and affordable. I just hope that if a future legislature does, they will be smart enough not to over promise what can be delivered.

The Legislature has tinkered with PERA some 93 times since 1969. Maybe that is part of the problem.