State to adopt a $30 million software tax break

The Associated Press
Tuesday June 25, 2002

SACRAMENTO — Years of persistent lobbying by high-technology leaders have led California’s tax board to give tentative approval to a $30 million tax break in software sales taxes at a time when the state faces a more than $23 billion budget shortfall. 

Though the proposal has received little public attention, it has caught the attention of budget-cutting lawmakers who are spending endless hours slashing everything from aid to the elderly to child abuse prevention programs. 

Assemblyman Darrell Steinberg, D-Sacramento, said his legislative budget committee is not in a position where they can afford additional tax breaks. 

“Every decision which impacts our budget in a negative way has to be looked at carefully, because the choices are already stark enough,” he told The San Jose Mercury News. 

The decision also caught cities in Silicon Valley by surprise. State tax officials gave no indication they planned to support the tax break until a few days before it was tentatively approved last month by the state Board of Equalization. 

Upset city officials, who rely on state sales taxes to pay for crucial services, fired off last-minute protest letters. But industry executives said it is too late. 

“On the one hand, I don’t disagree,” said William Lasher, a former tax partner at Arthur Andersen who spearheaded the negotiations for the industry. “But on the other hand, it is merely reinterpreting something under existing law that arguably should have been the case all along.” 

The dispute centers on a section of the tax code covering software maintenance contracts. State tax officials and software companies have argued for years over how much sales tax, if any, purchasers should have to pay on these contracts. 

The state had rebuffed industry arguments until one small company successfully persuaded the state Board of Equalization to ease the tax restrictions on his business. Then the tax officials launched a new round of discussions earlier this year with the American Electronics Association, an industry trade group. 

Publicly, the board staff opposed any change. But internal e-mails show the two sides had laid the groundwork for the tax break more than two months before the state publicly embraced a deal. 

The staff was trading e-mails with executives at Intel, a Santa Clara chip maker, and at Arthur Andersen, who were negotiating for the high-tech industry group to fine-tune language for a 50 percent tax break on software maintenance contracts.