Online Software Company Seeks Benefits Under New Domestic Production Activities Deduction

Dear Messrs. Solomon and Korb:

I am the Chief Financial Officer of salesforce.com. I am writing to respectfully request that you not exclude our company and others like us from the computer software incentives contained in the new Section 199, which was enacted as part of HR 4520, the American Jobs Creation Act.

I. Introduction

The Treasury Department and the Internal Revenue Service recently issued Notice 2005-14, which provides interim guidance under Section 199. Notice 2005-14 includes provisions dealing with software. We believe that these provisions are, in some respects, unduly restrictive and fail to take into account significant technological advances in the software industry in which it is no longer necessary to physically ship or download software in order for it to be fully utilized by an end user. There is a rapidly evolving and robust competition in the software industry between companies that ship or require the download of software to end users and companies such as salesforce.com that provide access to substantially similar software via the Internet. The interim guidance favors traditional software companies and inadvertently excludes companies such as ours whose only distinction in this regard is the means by which their product is delivered.

II. Background

• Monthly costs that are typically billed on a per user/per month basis (traditional software is usually licensed for a one-time fee that is paid at the start of the license);

• A "pay as you go" structure in which an end user pays only for the number of user subscriptions it needs (end users of traditional software usually must anticipate the number of users at the time they purchase the license);

• Lower costs overall because fewer end user IT resources are needed to implement and support the deployment, as the software is maintained by salesforce.com on the salesforce.com servers;

• Greater simplicity, because the only software the end user needs to keep on its systems is an Internet browser;

• Use of only the most up-to-date versions of the software because the system is upgraded as soon as updates to the software become available; and

• Greater protection from piracy and trade secret misappropriation because the software is never moved from our servers, thus making reverse engineering or decompiliation more difficult.

As our company and others that provide on-demand computing have attracted customers and acquired greater market share, our competitors have begun to offer their customers and prospects a choice of buying their applications as traditional packaged software or accessing it in an on-demand fashion over the Internet.

III. Fees for Use of Software On-Line Should Be Eligible for Incentives Under the American Jobs Creation Act

Notice 2005-14, issued by the Treasury Department and the Internal Revenue Service on January 19, 2005, interprets the deduction for domestic production activities of Section 199 to exclude fees received by software companies for allowing customers remote access to computer programs. Our core disagreement with Notice 2005-14 is that it requires a physical or downloaded "transfer" to an end user of a copy of a computer program in order to establish entitlement to a deduction under Section 199. The following points illustrate why delivery of code should not be a prerequisite:

As a result, the sub-industry that sells on-demand software has placed extreme competitive pressure on older and larger packaged software companies. Yet, the growing number of companies that follow this model of delivery will be penalized by the current guidance of Notice 2005-14. The unequal cost structure that the Notice is imposing on these companies will put them at a competitive disadvantage relative to other companies. It is also unlikely that the Treasury or the IRS will hear from these companies because they are small and generally lack the resources to track and respond to this issue.

Continuation of technological advancements and evolution of the fledgling "on-demand cornputing" industry will be impeded through disparate tax treatment of companies such as ours. Competition should be allowed to proceed with each company on an equal footing regardless of its distribution model.

This interpretation is also consistent with fact that Section 199 eligibility is not intended to be dependant on the means or methods of distribution. Congress specifically recognized that domestically produced films are subject to Section 199 deductions irrespective of the means of distribution. Software is no different from films in this respect because both can be distributed for customers' use in tangible and intangible forms.

IV. Conclusion

We believe that a physical transfer to an end user of a copy of a computer program should not be necessary to establish entitlement to a deduction under Section 199. As long as the development of functionally-equivalent software takes place in the United States, any revenue generated from such software, by whatever means of delivery, should qualify under Section 199.

We appreciate the opportunity to submit these comments, and we hope that you find them helpful in crafting future guidance with respect to Section 199.