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Tax consequences of WIN95 team members keeping a piece of software for testing

178 points| signa11 | 1 year ago |devblogs.microsoft.com | reply

113 comments

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[+] rswail|1 year ago|reply
In Australia, we have "Fringe Benefits Tax" which applies to that sort of thing.

Basically anything that is considered a non-cash benefit is FBT tax owed by the employer. The tax is at the current maximum marginal income tax rate (47%) on a "grossed up" value of the benefit (currently 2.08).

So $1000 of benefit is grossed up to $2080, then taxed at 47% so FBT of $977.60.

Employer can deduct cost of the benefit ($1000) and the FBT ($977.60) from the company's income as an expense. I've left out the complications of GST (VAT) in the example.

There are a bunch of exemptions and stuff (eg for Xmas/end-of-year parties etc) as well as allowable travel expenditure for work etc.

Basically designed to make the fringe benefit not worth giving to employees by employers so that they pay them the cash instead as income.

[+] duffmancd|1 year ago|reply
If anyone is wondering where 2.08 comes from like me. First we consider the case with no GST, where the gross-up multiplier is x1.8868 ($1887). This is the pre-tax earnings at 47% required to get a post-tax benefit of $1000. i.e. $1887 x (1-47%) = $1000. With some algebra and setting the top marginal tax rate to R, and the Gross-up to G: G=1/(1-R). The idea is the Government gets its cut either way, there is no tax benefit (for employees in the highest bracket, and actually a net loss for employees not in that bracket).

If the employer can claim back GST (currently 10%) on the original purchase, the formula for G becomes G=1/(1-R)+(1/11)/R. To account for the extra 10%/110% that the employer can claim back.

[+] lazyasciiart|1 year ago|reply
America never did that because it would disrupt the careful allocation of health insurance to people with good jobs.
[+] hyperrail|1 year ago|reply
Fringe benefits not specifically excepted are also taxable wage income in the United States, but I don't think employers are forced to gross them up at the highest marginal tax rate or are otherwise discouraged from giving them out in lieu of cash.

The USA's income tax agency, the Internal Revenue Service or IRS, has a whole booklet to help employers figure out how to withhold taxes for fringe benefits:

https://irs.gov/pub15b - Publication 15-B, Employer's Tax Guide to Fringe Benefits

It discusses the de minimis exception mentioned in the originally linked page, as well as exceptions for some meals - important if your employer gives you free or discounted cafeteria lunch or restaurant lunch discount coupons.

[+] londons_explore|1 year ago|reply
Tax agencies don't go after air miles and other points schemes clearly designed to waste $$$'s of company money to get $ in their own pocket tax free.

Considering that, I don't think they really care too much about a few engineers being allowed to keep loaner copies of software they used for testing.

[+] rjst01|1 year ago|reply
The IRS decided in 2002 that taxing air miles was too difficult: https://www.irs.gov/pub/irs-drop/a-02-18.pdf , but I wonder if this might change in the future if airlines continue to shift towards programs that reward dollars spent rather than miles flown + ticket class.

Some countries have specific legislation to exclude air miles.

[+] x-egghead|1 year ago|reply
Interesting.

So the Egghead store in San Jose on Blossom Hill Road had 2 interesting employee perks:

0. Vendor reps, including those from Microsoft, were happy to see you cheap NFR copies ($10-25 USD mostly, with some expensive packages going for $50-150) of almost their entire catalog of retail and semi-retail channel software.

1. Here's the shady one: since 99.9% of software was only "sealed" by shrink wrap and having a shrink wrap machine in the store to fix damaged or packages missing sealing altogether, it was essentially impossible to tell, as an end purchaser, if a particular item had been used and resealed. This was by design to avoid throwing away returned product or sending it back to the manufacturer as a loss. An unofficial benefit was created to deter shrinkage (employee theft) at this store in particular, had an unwritten policy established by the manager that permitted employees to temporarily "borrow" software that wasn't sealed or was already unsealed such as being returned.

I helped closed the store in 1997 after the CompUSA tech hypermart format ate tiny stores like ES that would eventually also meet its own demise.

[+] galeos|1 year ago|reply
We were also allowed to borrow and re-shrinkwrap games at the Game store I worked in, in the UK, in 2000. Seemed like official company policy to give us better product knowledge!
[+] flomo|1 year ago|reply
For that type of employee, it would all fly under the standard deduction anyway, so the IRS would not care. (Unless you had a side-business making $$ on this.) This is the first Raymond Chen post I've read which seems kinda dumb and pointless. Oh yeah I need to deduct my copy of random DOS app DBPieGraphicsPro-VII, which was left on a table at work.
[+] jbm|1 year ago|reply
Wait, they managed to get Wing Commander 3 working on Windows 95??

> Bonus chatter: During one of the many iterations of this story being retold, someone remarked that they got a copy of the video game Wing Commander III through this exercise. I immediately remembered that they fulfilled their expectation by filing a bug against Windows 95: When you earned the cloaking device on level 58 or something, you couldn’t activate it.

I never managed (not that it mattered, it took 10-15 minutes to load each mission even on DOS; I imagine it would have been worse under Windows 95).

[+] ido|1 year ago|reply
Would it have been worse? I don’t recall dos games running any slower under windows 95 than under dos.
[+] rrr_oh_man|1 year ago|reply
I remember playing (and finishing) it on a 166 MHz Win 95 machine.
[+] criddell|1 year ago|reply
The tax question I've always had is around conferences. If I attend a work-related conference in California, I'm being paid to be there and so that's California sourced income and I have to file taxes, right?

During the pandemic when everybody was working from home, I thought about renting some place with more interesting scenery for a few weeks. I mentioned it to my bosses and was given a very short list of places where I could do so without triggering tax issues for myself or the company (later in the pandemic more options opened up).

When I looked into it, it seems like lots of states are pretty strict about tax requirements for people working remotely from their state.

[+] nickjj|1 year ago|reply
> If I attend a work-related conference in California, I'm being paid to be there and so that's California sourced income and I have to file taxes, right?

I'm not an accountant but I have read that baseball players pay state taxes based on where they play, such as away games in a different state. I'm not sure if it applies to tech in the same way, it sounds like it would be a nightmare to file, especially if your company has trips where most of the company might be operating in a different state for a few days or a week.

For example[0]:

> Professional athletes' taxes are also much more complicated than the average taxpayer. In the U.S., people must pay taxes based both on where they live and where they work. That means when the New York Mets play the Dodgers in Los Angeles, Mets players can be taxed for the days they played in California.

[0]: https://spectrumnews1.com/ca/la-west/sports/2023/12/15/ohtan...

[+] fred_is_fred|1 year ago|reply
I briefly worked for a very large consulting company after an acquisition. As a part of the acquisition we were flown to a large city for 3 days of meetings. My next pay stub showed hours for my home state, hours for the state where we had meetings and a remittance for city income tax also. I left right after, but I still had to file:

Federal

State (mine)

State (meeting state for 2 days)

City (meeting city for 2 days)

No other company has ever done that to me, I assume it provided some benefit to my company to do it that way.

[+] toast0|1 year ago|reply
Yes, work days while you're present in California are California source income. The California Franchise Tax Board has suggestions for how to apportion your employment compensation if it's not clearly obvious from hours etc.

I had thought there was a de minimis rule, so you need not report for a small number of days and a small income, but formalization of that policy was only proposed, not passed.

[+] dpifke|1 year ago|reply
Yes, if you are physically working even one day in California in a given year, the Franchise Tax Board expects you to file a non-resident tax return. (How enforceable this is will depend on your other ties to the state and your personal risk tolerance.)

At one point, California and New York were unique in this, but I believe the practice has spread to other states, especially as a result of remote work becoming more widespread.

The relevant case (from 1989) is https://caselaw.findlaw.com/court/ca-court-of-appeal/1772838....

Edit to add: as someone who moved out of California 10 years ago, I've been advised by a professional to basically continue filing a non-resident return forever. If I file a return that says 0 days in state and $0 owed, the FTB has a statutory time limit to contest that assertion. If I don't file anything, they claim they have an indefinite lookback period.

[+] bombcar|1 year ago|reply
Most of this strictness comes from taxing baseball player’s income for the games they play in state.
[+] lasereyes136|1 year ago|reply
Ask a tax lawyer.

My understanding, which is not legal or tax advice, is that, as a private person, you pay taxes in the state you have your primary residence in. There are a lot of rules around what it means to have a primary residence, so you need to check those.

[+] barryrandall|1 year ago|reply
That's one of the reasons why Mexico and Canada are so popular for company meetings.
[+] billy99k|1 year ago|reply
Are air miles taxed in the US? United airlines has a bug bounty program and they send you a 1099 for the miles and they say the points are valued a 2% of point value (you are taxed on this).

After calculating the point value and the amount I would pay for flights, I would actually pay more money in taxes than I would if I just paid for the flight myself, making the points mostly worthless.

[+] BuyMyBitcoins|1 year ago|reply
Credit card rewards on purchases are not taxable events. They are considered refunds/rebates by the IRS.

In this scenario United Airlines is compensating people for a service, so these airline miles are considered income. That is why they need to compute the dollar value of those miles in order to report the tax burden. This happens whenever someone is paid with something other than dollars, and when people barter.

[+] nick__m|1 year ago|reply

  I immediately remembered that they fulfilled their expectation by filing a bug against Windows 95: When you earned the cloaking device on level 58 or something, you couldn’t activate it.
Level 58! Wow, that’s a dedicated employee!
[+] trylfthsk|1 year ago|reply
My least favorite taxes right now are those that apply based on location.

In theory, my tax return requires about 4 extra states and a few cities, and a bunch of state registrations, and my payroll provider doesn't support the operations; so the net result is a Helleresque fever dream.

In practice, I never leave home on paper.

[+] wpietri|1 year ago|reply
Huh. I would argue that the software remained the property of Microsoft, and so there were no tax consequences. Presumably if the Windows 95 development manager said, a year later, "Hey guys, time to give all that stuff back," they would. It's just that nobody asked for it.
[+] bennyhill|1 year ago|reply
Employees leave and they presumably didn't ask for anything not in inventory and couldn't ask afterwards with any consequences..

I would view it similar to letting people pick through your ewaste trash. It might have value but the company has written it off.

[+] kazinator|1 year ago|reply
Permanent loan, type of thing. Also, they would likely give the stuff back, stuff being the installation discs. Not actually remove it from their PCs.
[+] paxys|1 year ago|reply
The linked post has more details. It was an explicit "you test the software and get to keep it for yourself after that".
[+] miga|1 year ago|reply
Sharing software to be tested for free seems an unalienable right of the company, and indeed many companies distribute free keys to testers.

Here author talks about taxing software that remains with the employee, as if it were "gift" or "taxable benefit" of employment, not an exercise of unalienable right to share software for testing.

Sounds more like tax office logic, instead of common sense.

Taxable benefit would occur if Microsoft bought software of others and gifted it to employee. Or if Microsoft could not reasonably expect people to actually test the software, or allowed them to resell it.

It seems like this article does not distinguish non-monetary "benefit" from employment from necessity that the company gives free license to use its software for testing.

[+] ambentzen|1 year ago|reply
> Taxable benefit would occur if Microsoft bought software of others and gifted it to employee. Or if Microsoft could not reasonably expect people to actually test the software, or allowed them to resell it.

Isn't that exactly what they did?

[+] offices|1 year ago|reply
In TFA, it's 3rd-party software.
[+] kazinator|1 year ago|reply
What if it's not your employer? If you buy a pizza for $25 and get another one free, is that also $25 income that is only exempt due to de minimis?
[+] dsign|1 year ago|reply
It it's not your employer, then for tax purposes it will be considered that you bought your pizzas at $12.5. You always get to pay sales taxes on the $25 amount.

If it is your employer giving you the pizza, there is a different story. I can't tell you how it would work in USA, but I'll tell you how it would work in Sweden. In a few cases, which include you being an employee of United Nations, you wouldn't pay taxes on the pizza (hurray!). But if you don't qualify for the exceptions, your employer would have to account for the $25 as if it were salary and tax it accordingly. Just for amusement purposes I've computed that for you: 33% in income tax, 31.4% in payroll tax, 20% in state tax if you earn over $4500/month, and 12% in VAT (but that one your employer gets to zero in this particular example). The 31.4% is not subtracted from your payout but just paid by your employer (or yourself, if you are self-employed). All in all, you eat your free pizza worth $25 and your employer deducts from your salary $13.3 to pay in taxes, and in addition to that pays $8 in payroll taxes. That gives the tax office a neat $21 for that $25 pizza you ate for "free". Your employer also has to pay for the pizza, of course, but they can deduce whatever VAT was in its price.

[+] snotrockets|1 year ago|reply
That is considered a sales discount (you wouldn’t get a free pizza without buying another one), and as such not taxable. Just as if you’d buy something on a 50% sale.
[+] wodenokoto|1 year ago|reply
Yes.

Gifts are taxable when they accumulate to a certain size.

[+] londons_explore|1 year ago|reply
> changing Windows 95 so that it installed the Ctrl+C hotkey handler only when a clipboard paste operation was active,

My understanding of the windows clipboard is that at boot time, the clipboard was empty, but at any other time the clipboard would retain the last thing copied.

That presumably means this game would work after a fresh boot, but any other time the game wouldn't get past level 58. Doesn't sound fixed to me.

[+] michaelt|1 year ago|reply
It's a long time since I've pasted something into a Windows 95 DOS terminal, but I don't think it worked the way you're thinking.

IIRC by default you couldn't just select text with the mouse - as DOS had never had mouse support, and didn't really have the concept of text being selected.

You had to click a particular button to activate text selection before it was possible to copy.

The GUI looked like this: https://commons.wikimedia.org/wiki/File:Microsoft_Windows_95... you'll note there's a toolbar at the top; the dotted square to the right of the 'Auto' dropdown let you select text, then the copy and paste buttons to the right of that let you copy and paste. You'll note that, with no text selected, the copy button is greyed out.

I am confused by the article, though - Ctrl+C is famous as the copy key combination, and yet apparently it's the 'cancel active paste' key combination? - so perhaps someone with an even better memory will correct me :)

[+] wmil|1 year ago|reply
I think there are two Ctrl+C actions. The normal copy, which wouldn't be active for an ms-dos application. However there's a second Ctrl+C to cancel a long paste operation.

Pasting in Windows / Mac is more complex than most devs these days realize, you can copy vector graphics between MS Office and Adobe Illustrator and it will work out a transfer format.

Being able to cancel a long paste was an important feature.

[+] kazinator|1 year ago|reply
What does it mean to "keep" the software? You can return the installation media, and say you erased the program, without having erased it.

I would say that if you work for Microsoft and they give you a program free in order to test, then it's not a form of income. The program doesn't represent monetary value in that situation. Microsoft, the copyright holder, is licensing you to have a copy of that program under terms which do not involve exchange of money.

This interpretation could be strengthened if the medium were marked as not for sale or resale.

Something given to you cannot count as income if you cannot resell it, or not legally.

The interpretation could be further strengthened if the gifted software is not entitled to any support.

Now let's think about dual licensing. Suppose you can obtain a proprietary version of a program for $100, or you can get it free under a copyleft license. It's exactly the same program, just packaged with different licenses. Have you received $100 worth of income? Or is it nothing, because the free one comes with no support?

[+] michaelt|1 year ago|reply
> Microsoft, the copyright holder, is licensing you to have a copy of that program under terms which do not involve exchange of money.

As I recall, this anecdote is part of a larger story:

* This was at a time where it was common to buy software in retail stores, it would come in a fancy cardboard box with a stack of floppy disks (or a CD-ROM), a printed manual, a warranty card you could mail in, and so on.

* Microsoft wanted Windows 95 to have good compatibility so someone went to a software store and brought one copy of everything the store sold.

* Then Microsoft handed these out to Windows 95 testers and told them "You can have this for free if you report any bugs you encounter"

* The employees received (and got to keep) the physical box, installation media, manual etc.

> I would say that if you work for Microsoft and they give you a program free in order to test, then it's not a form of income.

Tax authorities have fairly strict (and complicated) rules about this sort of thing, to stop companies/employees dodging income tax using 'free' gifts.

If I could give my employees a $50k cash bonus and it got taxed at 24% or I could gift them a $50k car "for testing" and it was tax free, everyone would be getting paid in cars.

[+] wodenokoto|1 year ago|reply
> Something given to you cannot count as income if you cannot resell it, or not legally.

That definition definitely doesn’t pass muster. You can gift employees Spotify accounts, in their name. Not resellable, definitely a gift.

[+] bjornsing|1 year ago|reply
This sounds surprisingly logical to me as a Swede. Here you can be taxed for income even if you didn’t receive anything at all. Take for instance a company office with a canteen exclusively for employees. Let’s say the canteen charges 20% under market price for a meal. In that case the employees can be taxed for having access to that canteen, even if they don’t eat there. This access is considered a taxable income.
[+] Kwpolska|1 year ago|reply
> Microsoft, the copyright holder

Nope. The entire point of this was testing third-party off-the-shelf software.

[+] tedunangst|1 year ago|reply
Eh, well, in this scenario they did keep the installation media, and Microsoft isn't in a position to add resale terms to other parties software, etc., etc. They are not the copyright holder.