Journal evought's Journal: Would "Fair Tax" (H.R. 25) end Open Source Software? 2
I was doing research on the (US) "Fair Tax" proposal (HR 25) which would abolish the IRS in favor of a national sales tax. In doing so, I noticed the provision which enforces taxes on bartering (sec 201'S103.d)) ) and was upset enough about that, but then I discovered that in combination with the fact that services would be taxed, not just products, and that "computer software" is explicitly excluded from "intangible property" (Sec 201'S2.a)(6)B), it may mean that Open Source software writers and users would need to pay sales tax on the "fair market value" of the software. I am hoping that I am missing something or reading something incorrectly, but here are the details:
Section 201'S103.d) reads:
(d) Barter Transactions- If gross payment for taxable property or services is made in other than money, then the person responsible for collecting and remitting the tax shall remit the tax to the sales tax administering authority in money as if gross payment had been made in money at the tax inclusive fair market value of the taxable property or services purchased.[Emphasis mine]
Open Source software (well, technically GPL-like licenses) is essentially a barter between a license to use the software on the one hand and a guaranteed license to use any resulting derivative works on the other. "You get to use this for free, but in exchange, I get whatever you make from it." Since all goods and services would be taxed under this proposal, then this would indicate that a user of Open Source would need to remit tax based on the "fair market value" of the software on the one hand and the writer would need to pay taxes on any software licensed back to them in return.
The potential taxes in this case are clearly going to be much higher than the typical price of the software ($0) and the software licensed back, especially for someone very early in the development tree might generate enough tax liability to bankrupt them.
Now, the Fair Tax does not tax "intangible property," so does this give us an out? A copyright is usually considered intangible and is, in fact, listed in Section 201'S2.a)(6)A as "intangible". But... B in that same subhead specifically excludes software from the definition of "intangible property" so it would be explicitly taxed under the "Fair Tax":
(B) CERTAIN TYPES OF PROPERTY- Such term does not include tangible personal property (or rents or leaseholds of any term thereon), real property (or rents or leaseholds of any term thereon) and computer software. [Emphasis mine]
So, presumably if I write a piece of software which might be marketed at, say, $100 a seat, and I release it under the GPL, then you would have to pay $30 in taxes to use it. If you go an turn it into a multi-million dollar system for removing brain tumors (and, as required, license the derivative work back to me), I now owe $800,000 in taxes and need to file bankruptcy (but I get to keep my silverware up to a certain value).
Obviously, this is nonsensical, but it seems to come from a plain-reading of the law. But wait, business-to-business purchases are not taxed, right? Right, at least mostly. If you use a taxable service or product in the production of another taxable service or product (see definition in 201'S2.a)(8)) then you only pay taxes on the last item or service in that chain. So, if you use my Open Source product to run your store, you need not pay taxes on it; the taxes will come out of the sales of your products. But if I use my software for personal use, I am still bankrupt.
The only other out I can see is if the donor simply makes the software public domain (in which case there is no reciprocation and no barter going on) or if all code is contributed to a "qualified non-profit" organization. In the latter case, the non-profit would not pay taxes on any benefit received and at least business users of the "free" software would not need to pay taxes on it, but private individuals would still need to pay taxes on the "fair market value" of the license they receive (and the qualified non-profit would have to collect those taxes).
What am I missing?
What you're missing (Score:2)
You're missing a government that wants to extract the maximum amount of money from the public.
Re: (Score:2)
You're missing a government that wants to extract the maximum amount of money from the public.
True enough.
A lot of people are pushing the "Fair Tax" as a way to "tie government's hands" but I keep seeing the ways it can be twisted and misused.