Posts Tagged 'Taxes'

July 11, 2011

Texas House Bill 1841: Hosting and Taxes

Okay, so you've read the title and passed out already ... but wait – this is good stuff! Well, maybe not "good," but at least it's relevant. The esteemed governor of Texas with the big Texas hair (and aspirations of taking his big hair out of Texas) recently signed House Bill 1841 (HB1841) into law, and that law is significant to many of SoftLayer's customers.

Last year, the Texas Comptroller's Office amended a regulation and stated that the use of a server in Texas was adequate to establish a nexus, so an e-commerce vendor who used a Texas web host was required to collect sales tax from their customers even if the vendor had no other presence in the state of Texas. This amendment immediately created issues for web hosts with data centers in Texas: Why would customers get servers from a host in Texas and have to worry about this tax obligation, when they could do business with another host outside of Texas and not have this obligation?

Well, the Comptroller's Office started to realize the effect of this regulation and began to backpedal and say that they didn't really mean what they said.

HB1841 puts the Texas hosting industry back where it was before the Comptroller made those changes: The use of a server located in Texas without any other presence is not considered a substantial nexus for collecting sales taxes. HB1841 specifically states that "A person whose only activity in this state is conducted as a user of Internet hosting is not engaged in business in this state." Note: You may be wondering if this bill applies to Amazon in Texas, but HB1841 doesn't cover Amazon because they had a physical presence in Texas (albeit one operating under a different affiliate with a different name), requiring them to pay sales taxes.

Our very own Brenk Johnson was involved in the effort to pass HB1841. He attended a couple of committee hearings, and he'll tell you his mere presence got this out of committee and in front of our governor. He is quoted as saying, "I can sit in a meeting with the best of them."

At the risk of making this blog sound like an Academy Awards reception speech, we would like to thank Jeff Clark and the crew over at TechAmerica for helping to get this bill passed. TechAmerica is a technology advocacy group that we recently joined, and they have a cracker-jack lobby group. Our CFO and I were on the verge of hiring a lobbyist for the 2009 Texas session, but we ended up not doing so. Two years later, we decided to go with this industry group, and the verdict is that TechAmerica has been a great investment ... It was also through this group that Lance became a Cloud Commissioner! We also want to thank our competitors over at RackSpace, especially their General Counsel Alan Schoenbaum, for getting us involved and for leading and spearheading the passage of this bill ... What was good for the goose was good for the gander on this one.

Because we are back to where we were a couple of years ago in the definition of nexus with relationship to hosts with data centers in Texas, this was not really a game-changing bill. It was important to clarify and undo the damage caused by the waffling that occurred in the State's Comptroller's Office, so in that sense this was a good bill for the industry. Next session we're going to aim for the game-changer: Margin taxes!

-@badvizsla

March 12, 2010

The Taxman Is Here

In my role at SoftLayer, I am asked by a number of people for our financial forecasts. Fortunately, we know our business well enough that our expectations for one year ahead have proven to be on target. For example, in December 2008, we told our bankers to expect 2009 net income (profit) to grow 254% over 2008 – and yes, this was at the worst point of the recession. When we closed out the books for 2009, net income actually grew 255%. Our forecasting error was one-third of one percent, and it was an error to the good side.

I can tell you right now that our profit projections will never, ever again be that accurate. Ever. Why is that? Well, after posting such a profitable year, the Taxman has showed up. You see, when you start a business, you usually post losses, not profits, for a while. SoftLayer was no exception here. After posting losses in 2006 and 2007, we turned the corner to profitability in 2008. So why were we not bothered by taxes in 2009? In a nutshell, the tax laws allow you to roll a portion of historic losses forward against profits before you must begin booking tax expenses. We had a meeting yesterday with our corporate tax advisor, and in 2010, we must begin booking tax expenses. Oh boy.

It’s one thing to look at your business model going a year ahead. We can look at macroeconomic indicators that are meaningful to our business and calculate the coefficient of correlation (R-square for you stat geeks) of our growth rate to those indicators and walk things forward. Then based on our anticipated sales growth, we can extrapolate how much datacenter space and power we will need to add, how many routers, switches, and servers to order, and how many people to hire.

Now, if you think that sounds complicated, just wait until you try to forecast how much tax you will have to pay. The biggest problem is the tax laws themselves. They are always moving and changing. In addition, they are sometimes changed retroactively. For example, in 2009, there was an allowance to take bonus depreciation on equipment purchased. (We purchase a lot of it, by the way.) This means that you are allowed to deduct a higher percentage of the dollars spent on equipment from your taxable income and thus lower your tax expense. Well, so far in 2010, there is no bonus depreciation available. BUT, there is a possibility that Congress will extend bonus depreciation into 2010, and make it retroactive to January 1. You tell me – how are we supposed to forecast that?

This is one of but many examples of the craziness of the tax codes that we encounter. As we open more locations in the future, I may blog a bit about some of the other craziness we find.

August 6, 2009

Punishing Success

Let’s say you worked for years to become a world class athlete. As a kid, you were in the gym while other athletes were at the movies. You were in the weight room on Saturday nights when no one else was there. You shunned pizza and soda in favor of grilled fish and fresh fruit. By the time Letterman hit the evening airwaves, you were well into restorative sleep. You were out the door for your morning runs while other athletes snoozed. As a result of all this, now you perform at an elite level and are very successful at your sport. Suddenly, you find that there are people who have a vested interest in helping you maximize your athletic potential. Your coaches, your managers, and companies who pay you to endorse their products all want to see you do your best. Why? Because doing your best helps them be more successful.

So, they provide you with all the things you need to maximize your potential. You get the best training gear and training regimens. You get the best nutrition. You get the right amount of rest. All these things help you maximize your potential. Thus the relationship is a nice symbiotic cycle – the more success you experience, the more success your coaches, managers, and endorsement companies experience. Win-win. Makes sense, right?

So, imagine the silliness if your coaches, managers, etc., made the decision that because you were so fortunate in your success that you had to “give back” almost half your resources to train the athletes who loafed, stayed out late, partied and gorged on pizza. Because you’re such a hard-working and smart athlete, you don’t need all those resources to participate adequately in your sport, they rationalize. Consequently, you don’t hit your potential, your coaches and managers don’t distinguish themselves, and endorsing companies don’t call you. You then feel that you’ve been punished for your hard work and success.

Sadly, much of our government policy falls under this flawed logic. The IRS just released their latest income tax stats for the year 2007. For that year the top 1% of earners paid 40.4% of all income taxes collected. We all know that right now we’re coming out of a recession and we really folks to invest in businesses and hire people to get the economy moving. So how do the 2007 numbers compare to, say, the 1980’s? During the ‘80’s, we managed to shake off the “stagflation” of the ‘70’s and get the economy rolling again. It was during this time that many technology juggernaut companies were spawned – Microsoft being a good example. So, how much of the income taxes in the ‘80’s were paid by the top 1% of earners? The average for the 10 years from 1980-1989 was 22.2%.

Let’s do some quick math. $1.116 trillion in income taxes was collected in 2007. Of that, $455.3 billion was paid by the top 1% of earners. If they paid 22.2% as in the ‘80’s, they would have paid $247.8 billion in taxes, and right now we’d have $207.5 billion MORE dollars invested in our economy. That would be quite a stimulus package! Our current policy punishes success and chokes off fuel from our economic engines while we’re trying to climb out of a worse recession than we had in the ‘70’s. Not smart.

Some may think that this would simply mean that our government deficit would be $207.5 billion higher. This is not the case at all. These folks that make up that top 1% didn’t get there by being lazy or not putting their money to work. I know some folks in that group, and they WANT to put their money to work! I know one gentleman who had to be told some legal docs for a deal could not be prepared over the weekend because Christmas was on that weekend. These folks are like the world class athlete I mentioned above – by and large they’re disciplined and hard-working. Their money will build new businesses and create more jobs, and the government will collect far more revenue from this new economic activity than it would give up in collections from these top 1% folks. Think about it – how many of us have ever been hired by a “poor” person? Instead of punishing economic success, we should encourage it!

Bottom line, if government policy were to make sense, it would encourage these folks to maximize their economic potential and find the correct balance of revenue to collect and yet still promote economic growth. What would we prefer? That the government collects 50% of $1 trillion or 30% of $2 trillion? Hint: 30% of $2 trillion is a WAY better deal.

At SoftLayer, we think very differently about things. We simply do not punish our customers for succeeding. We empower them to be more successful – why? Because if our customers succeed, we succeed. We get this.

Can we prove this? Perhaps a look at how customers vote with their feet is an indicator. For the past few months, SoftLayer has seen the lowest percentage of customers terminating business with us in our history. If we punished our customers for their success, they would go elsewhere.

April 2, 2009

We Need New Small Businesses

It is often said that small business is the backbone of our economy. According to the U.S. Small Business Administration, small business employs half of all private sector employees. Over the past decade, small business has produced between 60 and 80 percent of net new jobs. We need small businesses to prosper and lead us out of the economic mess in which we find ourselves.

I track growth in domain names every week. I think it indicates how quickly new small businesses are being formed. After all, what business can you think of today (large or small) that does not have some sort of web site? I can’t think of any. One of the things on any small business start up checklist today is the web site. Hence, most all of them register a domain name.

So what’s been happening with growth in domain names? Lately, it’s not too pretty.

Chart

With all the talk lately about stimulating the economy, one of the best ways to do this would be to encourage the formation of new businesses.

Some would argue that we need to fix the credit market mess to help banks be able to lend to small business startups. This couldn’t be further from the truth. How many small businesses do you know that started with a commercial loan from a bank? I cynically say that banks do not want to loan to businesses until the business can survive without need of a bank, and that was true even before the credit crisis. This was certainly true in SoftLayer’s case – when the founders were preparing for launch in late 2005, there wasn’t a bank anywhere that would touch the SoftLayer business plan. What I’m saying is that the credit crisis isn’t that much of a barrier to small business startups. Passionate entrepreneurs will find a way to get going.

But all the passion to start one’s own business doesn’t go very far in the face of the real barriers to starting a business. One of the real barriers that an entrepreneur must overcome is tax issues. Do they begin as a sole proprietor? A partnership? An LLC? An “S” Corp? Should they incorporate? All of them have different tax implications. All of them have to deal with either income taxes at the personal level or corporate level. Some have to deal with self-employment taxes. Others must deal with 941 taxes. Then there are state and local tax issues, such as the margin tax if you’re in Texas. And don’t forget sales taxes and property taxes either.

One of the strategies that allowed the Internet to cement itself in our society during the 1990’s was this: just let it develop without taxing it. Without that burden, the Internet took off like wildfire.

Ergo, if we’d like a bunch of new small businesses to get going, let’s ease up on the tax burden on new startups. This would cost the government hardly any money at all. Think about it – businesses that don’t yet exist do not pay any taxes. Workers that are not yet employed do not pay any taxes. Currently unemployed workers do not pay income taxes, except for a pittance on unemployment benefits. So allowing new businesses to form and employ workers and transact business “tax-free” for a defined start-up period would produce an EXPLOSION of small business startups.

How long should this tax free period be? Per the SBA, if a new business survives 4 years, they have a great shot at surviving long term. So why not give all new business startups a tax holiday for four years as they establish themselves? Can you imagine how big the tax base would grow as these healthy, strong 4-year- old businesses begin paying taxes?

It seems that the biggest issue facing our new President and his administration is how to pay for all the things they’d like to do. Let me suggest that expanding the tax base is the best way to grow government revenues, as opposed to increasing the rates on the current tax base. Allowing a flood of new businesses to take root and grow our tax base may be the best way to fund our growing public budgets.

Naturally, SoftLayer would be more than happy to assist these new businesses with our enterprise class data center outsourcing services so that the new businesses focus on their business plan – not their IT overhead.

November 7, 2008

Tax Policy as Pricing Strategy

One of the big items up for “spin” and a little debate in this Presidential election is the tax policy proposed by each candidate. We’ve heard accusations ranging from tax breaks for wealthy CEOs to socialist welfare where money is taken from the rich CEOs and given to the non-taxpaying poor under the guise of a “tax cut”. The word “fairness” gets thrown around a lot and now Joe the Plumber may get a record deal out of all this.

Absent any fiscal discipline by the government (and I have never seen this from either political party), it’s clear that the government needs more money or else it will run deficit spending until we’re all bankrupt. Therefore, tax policy should be nothing more than a pricing strategy to maximize government revenues. Taxes are essentially the government’s pricing structure for their offerings of goods and services (roads, law enforcement, subsidized student loans, etc.)

The problem is, if cutting a particular tax or tax rate will actually bring more revenue to the government, it will be criticized for whatever group “benefits” from the lower rates, regardless of how much better off the government treasury will be.

Yes, it is possible to bring in more revenue and profit by reducing prices. It is a very, very common practice in the business world and we employ this practice at SoftLayer. Consider this scenario:

You sell a product that cost you $50 to build.

At $100, you can sell 1 unit per month. Here is your revenue and profit calculation:

$100 x 1 sale = $100 revenue – $50 costs = $50 profit

Now, if you cut the price 20% to $80, you can sell 2 units per month. In this case, here is your revenue and profit calculation:

$80 x 2 sales = $160 – $100 total costs for 2 units = $60 profit

So, most people would think that $60 in your pocket is better than $50. By cutting the price, you have made more money.

What if you could sell 3 units if you drop the price to $60? Let’s take a look:

$60 x 3 sales = $180 – $150 total costs for 3 units = $30 profit

Because you only keep $30 profit, in this case the BEST price for your product is $80 because at that price you maximize the profit that you keep.

Likewise there are ways to increase government revenue by cutting tax rates. Let’s say we want to tax more dollars from the rich and give to the poor – fine. The paradox is that the way to get more tax dollars from the rich is to cut their tax rates. Really, I’m not crazy – Congress itself has reported this fact.

Business people know that if you raise your prices, people’s behavior will change and they will buy lower volume of what you sell. Even with must have items like gasoline, as the price rises, people find ways to use less of it, even if using less is inconvenient because you have to get up earlier to carpool.

By the same token, if taxes go up, those who are exposed to those taxes will change their behavior and reduce their exposure to those taxes. As a result, the government can actually collect less money by raising taxes.

Every time we set a price or run a special deal here at SoftLayer, we are well aware of this fundamental law of supply and demand. When we need to move units on a particular item, we will reduce the price.

I only wish our government would apply the same principle when pricing its products and services with tax policy – not because I want to pay less in tax but because I want the government to maximize its profit and avoid burdening our children and grandchildren with unmanageable government debt.

-Gary

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September 5, 2008

I Have a Crush on Sarah Palin

Let me begin by saying I don’t want to turn our company blog into something political and suggest how you should vote. I still haven’t decided myself for whom I will vote. Full disclosure – I haven’t voted Republican since I cast a vote for Reagan in 1984, when I was first old enough to vote.

But hey, Sarah Palin is a former state champion basketball player and sportscaster who competed in beauty pageants and enjoys hunting and fishing. What’s not to like here? Of course, I don’t want to raise the ire of her husband, Alaska’s “First Dude” Todd Palin. I mean, he’s won a 2,000 mile snowmobile race four times, and the one time I know of that he finished fourth, it was because he broke his arm along the way but still finished the race. First “dude” indeed!

Sarah Palin appears to have a background to which I can relate. She and her family are neither Ivy League educated elitists nor entrenched Washington DC insiders. From what I’ve read, she and her family deal with many of the issues that everyday folks deal with: transporting kids to their activities, going to church, running a small business, balancing a two career family, sending a son off to the military and to battle, raising a special needs child, and handling a teenage pregnancy situation. From this list of things, this family can identify with millions and millions of other families.

What I like most about Sarah Palin is that she and her husband have small business in their background. When asked why they eloped, husband Todd said they had a bad fishing year and thus had no money for a wedding. They understand the ups and downs of small business because they’ve lived it. Consequently, she has been cognizant of supporting small businesses in her policies.

Policies toward small businesses are important to me because small businesses are our bread and butter here at SoftLayer. That is who we serve – small businesses who need enterprise class IT infrastructure and services but are too small to provide them on their own. Though we are larger than most of our customers, SoftLayer still fits in the small business category. Hey, we came from 10 guys with a dream and no revenue for 6 months – you can’t get any more “small business” than that! The small business culture still permeates this place and I hope it always will. When I send out some sort of metrics report to the management team, it usually kicks off an email thread of smart-aleck remarks while we review the metrics.

Just so that I give equal time to both sides here, Barack Obama has outlined some specific policies that will affect small businesses. Along with 40 million others, I watched Obama’s historic speech at the Democratic convention. There were several things that I liked therein, such as his desire to develop new alternative energy sources. But when he talked about helping small businesses, I wonder if he’s out of touch with us because he said that he will eliminate the capital gains tax for small businesses. Well, SoftLayer is responsible for and pays a LOT of taxes (sales taxes, franchise taxes, property taxes, income taxes, etc.) but we have never paid a penny of capital gains taxes. Unless a small business running a small real estate or money management operation, small businesses do not have capital gains. They’re not putting cash into stocks and bonds and holding them to sell them at a later gain – they’re putting the cash into payroll and operating expenses and advertising and capital expenditures to keep their business alive and growing. Word to Obama – if you want to help small businesses, please eliminate a tax that we actually pay!

I am totally in favor of policies that truly help small businesses. You are our customer base and whatever helps you helps us. Consequently, we are very focused on serving your small business. We want to help you establish the best IT cost structure for your needs as well as take away the headache of IT infrastructure so that you can focus on your core business more effectively. Just talk to Steven, Mary, Amanda, Arielle, Chris, Doug, Daniel, Laura, Michael (either one of them), Patrick, Justin, Don, Mathew, or John. They’ll treat you right.

Again, I haven’t decided who to vote for yet. But if I select a Republican candidate for the first time in 24 years, I won’t necessarily say that I voted for John McCain – I’ll say I voted for Sarah Palin!

-Gary

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March 12, 2008

Things I Learned at the Post Office

I send exactly one letter a year: a signature form to the IRS to say that yes, indeed, I have eFiled my taxes. Other than that, I use the Internet, and to a smaller part mobile phones, for all of my communications. It's faster, easier, and significantly cheaper.

Walking into the post office, I felt as my Mom must feel when she comes with me to Fry's Electronics. A million options, and not a single clue where to go. All I knew was that, using the US Postal Service, I had to convey this sheet of paper to another post office in Austin.

Some lessons I learned:

The IRS requires a signature. On paper. For filing your taxes online. Or a "super secure five digit pin number" (which I used, once, a year ago and cannot remember). Or my return amount from last year (which is currently stored on hard cellulose media in a backup (box) somewhere in my garage). So signature it is.

Letters require an envelope. Email does not. However, being a post office, this was easy to rectify. For $.25

Letters require postage. Not only did they charge me for the paper sleeve, but they also charged me for "postage." The postal worker handed me the envelope and the stamp. I put the stamp on the envelope and handed it back. He took a rubber stamp and defaced that $.41 square of paper. Why didn't he just save me the extra step?

The post office doesn't automatically affix a "FROM" field to the envelope. He then handed the letter back, gesturing to the top left corner. Apparently, I needed to write MY address there, in case they couldn't find the recipient. Right!

First-Class Mail doesn't actually mean First. In fact, Priority mail goes out before first class. And so does Express mail. In fact, there doesn't seem to be a "Class" of standard mail below first class, making it "Last Class" mail (there is Parcel Post and Media Mail and Bulk Mail, but these aren't standard on-the-price-board listed services). This is like the old joke about the Soviet Union reporting that their car made second place, and the American car made second-to-last, without mentioning that it was a two car race.

Surliness is one of the few free services provided by the Post Office. Along with dinginess and long lines. Then again the guy behind the counter didn't have to make such a show of his open disdain for my inability to "properly" affix postage.

Unlike Internet forms, real world forms have two sides. With a barely restrained sigh, the federal agent behind the counter handed back my form, and made a twirling motion with his finger, requesting that I put my return address on the back of that form. Didn't I already give them my return address on the letter?

After filling out the envelope (twice) AND a certificate (both sides), the federal agent then proceeded to place stickers and stamps all over my envelope. When he was done it had no less than 3 stickers and writing over the entire surface. He then handed me a paper with a convenient 20 digit number I could use to check on the progress of the letter. By calling a "1-800" number. With a phone. It cost me $7 to send a single sheet of paper with my signature on it a mere 200 miles.

As I walked out with the civil servant's stare burning into my back, I thought to myself...

...why couldn't I just have encrypted my tax forms with my private key? Wouldn't that have been easier? And more secure.

Apparently the Post Office, headed originally by Benjamin Franklin (also known for the glass harmonica and a carriage odometer, along with other trifling achievements) used to be the fastest, and dare I say sole way to communicate over long distances. How did they ever get anything done? Seems like an incredible hassle to me.

-Shawn

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