Nothing is Certain Except for Change

Current Law§ 105-275. Property classified and excluded from the tax base.….(40) Computer software and any documentation related to the computer software.….

The exclusion established by this subdivision does not apply to computer software and its related documentation if the computer software meets one or more of the following descriptions:….b.         It is purchased or licensed from a person who is unrelated to the taxpayer and it is capitalized on the books of the taxpayer in accordance with generally accepted accounting principles, including financial accounting standards issued by the Financial Accounting Standards Board….

Software Situs: Where is it? Software Repositories?

• Data Centers and Server Farms can be anywhere.• Software can be stored anywhere in the country or the world.• Software can move anytime day or night.• Where is it capitalized?

• Cloud Computing• What is the Cloud?• Where is the Cloud?• Software can move anytime day or night.• Where is it capitalized?

What is a Server Farm?A Server Farm is a location with a very large number of servers that usually have no local users.

Below is a group of blade servers in a rack-mountable container.

What is a Server Farm?• Here is a series of rack-mounted servers and storage with backup.

• Linked farms are county-wide and world-wide.

• Heat build-up is critical—for every 100 watts of power consumption, 50 watts is needed to carry the heat away.

Cloud Computing

Cloud Computing

• Advantages• Economies of scale—they can do it cheaper.• Professional Management—they can do it better.• Data Center Redundancy.• Access anywhere with Internet capability.

• Disadvantages• Trusting someone else.• Cannot “touch it”.• Temporary loss in an emergency like a hurricane as when local fiber is strung overhead.

Variations on Cloud Computing:Data Only• Free for individual users.

• iCloud• Google Drive• Amazon Cloud Drive• Microsoft SkyDrive• Dropbox

• Extra charges for larger amounts of storage.• Long-term storage like Amazon Glacier.• Advantages:

• Access from anywhere on the Earth.• They manage it .• They back it up.• Inexpensive compared to local data centers.

Variations on Cloud Computing:Data Only

Standard storage designed to provide 99.999999999% durability and 99.99% availability of objects over a given year.

Amazon S3 Service

Variations on Cloud Computing:

Server and Data• PC’s connect to the cloud.

• Advantages:• Grows with demand—more demand can give more servers.• Economies of scale—they can do it cheaper.• Professional Management—they can do it better.• Data Center Redundancy.• Access anywhere with Internet capability.

• Disadvantages• Trusting someone else.• Cannot “touch it”.• Temporary loss in an emergency like a hurricane as when local fiber is strung overhead.

Variations on Cloud Computing:

Server and DataAmazon EC2 Service

Variations on Cloud Computing:

PC, Server and Data• Your PC or tablet connects to a PC in the cloud. New technology –not fully developed, and may not be.

• Advantages:• Easy to upgrade a PC in the cloud.• Economies of scale—they can do it cheaper.• Professional Management—they can do it better.• Access anywhere from any ordinary PC with Internet capability.

• Disadvantages• Can be MUCH SLOWER. • Temporary loss in an emergency like a hurricane as when local fiber is strung overhead.

Software Situs: Where is it?• Software can be copied instantly.

• Data centers and servers can move software instantly.

• Is Software Tangible or Intangible?

• Is software here or there?• Considerable software is downloaded to the local PC.• Considerable work done on the local PC.

• The place where software is capitalized can be moved with an accounting entry.

• Branches can be charged a license fee paid to the parent company• Capitalized costs can and should be allocated to user sites.

Software AppraisalWe appraise “things” not costs. Software is a thing. However, all capitalized costs must be considered.

• All licensing costs (unrelated entities).• Site licensing.• Per seat or user licensing.• Upgrade costs—they have an expected life.• Maintenance costs sometimes include upgrade licensing—hard to separate.

• Installation costs.• Often more than the licensing costs.• Data conversion from older systems.• Modifications for corporate needs.

• Done by outsiders.• Done by insiders--often includes ongoing changes.

Company Websites• Often at service providers like Go Daddy, Rackspace, Amazon, and many others.

• Security reasons.• Maintain web presence when local data center goes down.• Never, ever, put production data on the web

• Invites loss• Might expose sensitive data.

• Most popular website operating system: Linix—license cost $0.

• Most popular webserver: Apache—license cost $0.

• Most popular website database: MySQL—license cost $0 to very little.

Company WebsitesCosts to consider:

• Server set-up• Up-front fees for server contracts.• Free software is not free to install and configure.• Consultants are often used.

• Software licenses, if any.

• Webpage development.

• Database development.

• Major upgrades and major changes are usually capitalized.

• Transition costs.

Company Websites

• Costs: millions if not billions.• Amazon taxability in NC: not soon.

Terms You Need to Know• Hot site: a place to more your software and data in an emergency.• Servers: where most corporate data and software is stored.• Virtual Computers: one or more computers living on a different computer.• SAN: Storage Area Network or System Area Network (Windows).

• Very fast access.• Includes hard drives.

• Tape drives.• Optical Drives.• Other storage devices.

• NAS: Network Attached Storage.• Like a SAN but usually slower.• Can be anywhere on a network.

• RAID: Redundant Arrays of Inexpensive Disks• MAID: Massive Array of Idle Disks (infrequently accessed data)

Recommendations on Taxing Software

• Do audits.

• Get help from DOR and other experts.

• Is does not matter if software is tangible or intangible—it has characteristics of both and is taxable.

• In many circumstances, assert that it has situs where it is used.

• Do not be too aggressive.

• Be diplomatic.

Future of Software• Software vs. Hardware .

• Hardware keeps getting cheaper.• ½ the cost every 18 months.

• Corporate software will continue to become more expensive.

• Software as a strategic asset.• Facebook• iTunes• Production planning

• Software as a service.

• Nothing is certain expect for change.

• Beyond long-term predictions.

Questions?