Filed at 9:19 p.m. ET
SAN FRANCISCO (Reuters) - A California tax panel has recommended what amounts to a 50-percent cut in state sales tax for software maintenance contracts, a tax cut that could cost the state up to $28.3 million, officials said on Monday.
Representatives from the software industry, including trade group American Electronics Association, had lobbied the California State Board of Equalization, which regulates a number of taxation areas, to recommend sales tax should not be charged at all on software maintenance contracts.
The compromise proposal, recommending a 50-percent tax cut, could go into effect in the next few months if approved by the state officials.
Currently, the full amount of software maintenance contracts is taxable, but the Business Tax Committee of the Board of Equalization has recommended that just 50 percent of the value of such contracts be taxable, which amounts to a tax break.
The software industry, reeling from a protracted downturn, had argued the state's tax policy made it more difficult to sell maintenance contracts in California, the nation's most populous and richest state.
But the debate over tax breaks that would benefit Silicon Valley comes at a politically difficult time since California faces a $23.6 billion budget deficit, due in part to state payments during last year's power crisis.
The recommendation by tax regulators came after one small company persuaded the Board to ease tax restrictions on its business and the board directed auditors to look into the issue more thoroughly, said Geoffrey Lyle, a supervising auditor for the Board of Equalization.
The recommendation is ``a reasonable legal interpretation of what was and what was not taxable,'' said Lyle.
There will be another public hearing on the proposed tax change, which could result in changes, Lyle said.
After that, it goes to the Board of Equalization's Office of Administrative Law, to verify its compliance with tax law. Finally, it goes to the Secretary of State's office, following which it goes into effect, Lyle said.
