My Internet Consulting Business Does Not Physically Have To Be Here

By Mike Maddaloni on Wednesday, May 20, 2009 at 04:49 PM with 10 comments

My Internet consulting business does not physically have to be here. In reality, it can be anywhere. Most of you reading this probably are saying, “duh” as you already know that. This message, however, is not clear to politicians who make laws concerning taxes and favorable business climates.

As I write this, I am sitting in the corporate headquarters of my business, Dunkirk Systems, LLC, a 5-year old Internet consulting firm. I founded the business shortly after moving to Chicago from Boston, as I decided to go on my own after then working on the Internet for almost a decade and in IT for over 15 years. As my business would be initially based in my home, the business was established in the city of Chicago, in Cook County in the state of Illinois. I live here, my business lives here.

But I don’t always work here. As my computer can travel with me, I have done work in cities like Minneapolis, Oshkosh, Helsinki and Copenhagen. I have done work at 30,000 feet over the Atlantic Ocean and in the basement of friend’s houses. All I need is an Internet connection and I can connect to my clients and provide the Web site strategy, design and development services they pay me for.

It is one thing I can work from anywhere, but my clients can be anywhere as well. Most of my clients are outside of Chicago. This is not specifically by design, though, as my business has mostly grown by referrals from existing clients. As well, some of my clients have relocated to other states. Even for the clients I have in the Windy City, I typically work with them by email and phone. Don’t get me wrong, I am a very social person and prefer to personally work with my clients. I don’t always have to, which is the beauty of it.

I bring this up as there is talk in the Illinois legislature about imposing taxes on software and Internet services. Though no particular bills have been presented as I write this, apparently legislators are trying to see what they can “get away with” as far as a bill, one that would pass rather than be defeated.

As much as I strive for The Hot Iron to not get into the abyss of politics, it is almost impossible today. It goes without saying that such laws to add taxes on the services Dunkirk Systems, LLC and other similar firms in Illinois provide would have a huge negative impact on my business, not to mention on clients. There is the administrative impact on my business for calculating, collecting and paying such taxes. I have all that I need to do for employment taxes! Then there’s the additional line item on client invoices. When people and businesses are doing all they can to pay their bills, here comes more to pay.

Will my clients simply accept a tax without a peep? Hardly! Who knows what the tax rate would be, but I am sure some will start to look around for other providers in other states whose rate – including tax rate – is lower. As I try to competitively bid on projects, the fact I will be charging a certain percentage for tax will be a bad mark on my proposals. Not to mention the higher cost I myself will have for technical services I get from other individuals and firms. This, on top of the myriad of high taxes and fees including the highest sales tax in the United States at 10.25%, put me in a huge disadvantage against other capable consulting firms around the country and the world.

So what will I do? This blog post is my first step, as I plan on also forwarding it to my state legislators. However knowing the political climate in Illinois, I hardly believe it will make a difference. Beyond that, I can only react in the short-term as to any passed tax laws. In the long-term, though, if it does have a true negative impact, I may be forced to move Dunkirk Systems, LLC from Illinois, which would more than likely mean I would be leaving as well. My business moves, I move.

Taxing our way out of the current business environment will not work. Tough cuts and imaginative thinking are needed to recover to the greatness we are capable of. I will continue to do my part, though it may have to be from someplace else.


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Business • (10) Comments • Permalink

Comments

What is the tax that IL is trying pass?

Thanks.

Picture of btn Comment by btn
on 05/20/09 at 06:38 PM
 

Here’s a few links that talk about it:

http://www.axthesoftwaretax.com/
http://www.protectiltech.com/

mp/n

Picture of Mike Maddaloni Comment by Mike Maddaloni
on 05/20/09 at 07:17 PM
 

Mike, y’all are welcome to set up in Charleston, South Carolina!  SC has been known to opt out of Washington tyranny from time to time.  I also know that Savannah, GA has a real tech push on.  It seems like the best one can do with the Mooches of the legislature is shrug!  Shrug and leave!
Y’all come and set a spell.
Peter

Picture of Peter Alan Smith Comment by Peter Alan Smith
on 05/21/09 at 11:23 AM
 

Thanks for the invite Peter - will definitely be coming for a visit, and will want to check out the marketplace!

mp/m

Picture of Mike Maddaloni Comment by Mike Maddaloni
on 05/21/09 at 11:58 AM
 

Wow, is there actually a chance that the software tax provision in the “Invest in Illinois Fund” will actually pass?

BTW, it seems that IL has the same problem we have here in California where special funds get created because our elected officials have a gross inability to manage budgets well. :p

Picture of btn Comment by btn
on 05/21/09 at 06:00 PM
 

Well Brian, all parking meters in Chicago were outsourced for 75 years and there was barely a debate!  It has been a disaster, and now the city council wants to repeal the law.

Maybe we need more businesspeople than lawyers as our elected leaders - people who have actually had to manage money!

mp/m

Picture of Mike Maddaloni Comment by Mike Maddaloni
on 05/21/09 at 08:10 PM
 

I have thought a lot about the idea of “my web biz does not have to physically be here” myself this last year and find it very frustrating that I have had two cities not live in nor work hunt me down for taxes. 

I pay my IRS and Calif State Franchise taxes, not quite sure why the city of Huntington Beach or the city of Orange wants a slice of my business’s hide. All of the rules and regulations for running a small business, be it a DBA/Sole Proprietorship or a Corporation of 1, make me want to run for the hills and live in a tent.

If California and Illinois, or any other state, want small businesses to thrive enough to employ more folks and pay their taxes, then they need to streamline the whole system, from beginning to end. 

How ever are they going to encourage start-ups if one is taxed and badgered by bureaucratic administration at every turn?

Picture of Ms. Jen Comment by Ms. Jen
on 05/24/09 at 02:37 AM
 

Unfortunately Jen I don’t think that will ever happen.  I once heard the Small Business Administration does not have a definition of what a small business is!  If they can’t define, they sure as heck can’t make it easy!

mp/m

Picture of Mike Maddaloni Comment by Mike Maddaloni
on 05/24/09 at 05:37 PM
 

Hi from Paris,
Living in an over-taxed country, I find your debate very interesting (we small entrepreneurs all try to avoid paying more taxes).  For instance, you wrote:
“My business moves, I move.” May I ask why? You don’t need to live where your business is registered.  Paperwork can be sent over state lines can’t it? Maybe I’m missing something.  I thought you could pay corporate revenue-based taxes in one state, and employement-based taxes wherever you employ people (yourself).  This way you lower taxes and live wherever you want (perhaps somewhere with a warmer winter climate).

Picture of Hugues Comment by Hugues
on 05/25/09 at 05:05 AM
 

Hi Hugues:

First, thanks for reading, and I appreciate the international perspective.

From what I have gathered from entrepreneurs I have met, they establish their business where they live, namely for cost.  My business, Dunkirk Systems, LLC, is a Delaware limited-liability corporation, as most businesses are registered in Delaware, Nevada and Alaska as they tend to have the most business “friendly” laws.

I could, as you mentioned, have my business in one state and I live in another.  I would need to perform the calculations to determine by doing so how much more it would cost me as compared to the overall savings.  Additional costs include paying CPAs and lawyers to make it happen, plus recurring costs.

Even if I do so, I am living in Chicago, where the sales tax is 10.25%, the highest in the US!  The overall cost of living here is extremely high, as compared to those areas close by where I may want to live and have my business anyway.

mp/m

Picture of Mike Maddaloni Comment by Mike Maddaloni
on 05/26/09 at 01:09 PM
 


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