In June, Forrester Research, projected a 6 percent growth in IT spending, significantly higher than the one-to-two percent projected about a year ago. Even more encouraging, Forrester then expected software spending to jump 9 percent in 2004 and computer and communications spending to grow 16 percent and 13 percent, respectively. While hardware prices in June 2004 remained steady, software prices stayed weak. In short, IT spending seemed to be gathering a head of steam in the first half of 2004 as business conditions started to improve, but not all IT assets enjoyed the same interest. See: A Recovering Tech Market, by Demir Barlas, Line 56 (on-line) Aug. 30, 2004.

In August, the Computer Technology Industry Association (CompTIA) issued a study that suggested confidence in an improving business environment over the next 12-to-18 months. Based on a survey of IT resellers, value-added resellers, service providers and system integrators in North America, nearly 90 percent of the participants expected revenue growth of 10 percent or more for their companies while only 9 percent of the participants expected a decline in revenues. See: IT Industry Optimism about Business Conditions, by Sandy Kendall, Metrics Section, CIO Magazine (online), Aug. 19, 2004.

*Opportunity Point: According to CompTIA, revenue growth will come from increased sales rather than mergers and financial engineering. Consequently, opportunities to finance and lease equipment should expand to reflect that growth, but may be tempered by reluctance of CEOs to outpace the improved results of their companies. CompTIA suggests that the greatest area of spending includes systems integration and application implementation, network security and storage solutions. Look for highly distributed network environments to lead the way to strong growth over the next 24 months, with a significant soft cost component on services as a way for the IT sellers and resellers to gain margin. Enterprise software or "strategic" software should rise 9 percent according to Forrester. Tech spending expected to grow, but also change in 2004, Detroit News Technology. However, federal government IT spending may dip about 4 percent. See: Federal Spending Dips, by Demir Barlas, Line 56 (on-line), July 23, 2004.

The August CIO Tech Poll^tm confirms the potential for these opportunities. In its press release, it said:

In August's CIO Magazine Tech Poll^tm, the outlook for IT budgets is the strongest in three years. CIO's predict an average of 9% spending growth over the coming 12 months with the most growth occurring in security software and storage. In addition, 62% of respondents report they are experiencing "significant" application backlogs. The biggest surprise in this month's survey is the sharp increase in infrastructure software. Forty-two percent (41.8%) of respondents indicate plans to increase infrastructure software spending compared to 28.6% at this time last year, a sign of a possible increase in software spending.

The bottom line, however, suggests that growth will continue unabated even though technology companies continue to suffer from a bearish sentiment on Wall Street. See: Shakeout Hits Tech Sector Amid a Tepid Recovery, The Wall Street Journal, (S.W. Ed.), Page A:1, 3, Col. 1, 3, Aug. 13, 2004. CEOs, CFOs and CIOs have different views of appropriate spending levels. CIO Magazine quoted a noted economist indicating the positive direction of the market:

"Despite the disappointing performance of technology stocks recently, our poll shows a gradual but consistent improvement in IT budget trends." says Dr. Ed Yardeni, Chief Investment Strategist for Prudential Equity Group, LLC.

Forrest Research found recently, due to increasing CIO confidence in the economy, that 39 percent of companies it polled expect spending to surpass their budgets, and 66 percent will raise budgets in 2005. CIO Confidence Poll: Q3 2004 IT Optimism Jumps Again In The Third Quarter, Forrester Research, by Tom Pohlmann with Natalie Lambert, Aug, 24, 2004 (subscription required).

Companies have developed significant goals for their IT systems. The systems must provide reliable and simple performance, cost efficiency, improved productivity, and competitive and strategic advantages. These goals tend to demand ever increasing flexibility and updated hardware and software resources. These requirements do not necessarily indicate that companies can or will write large checks to buy these tools.

Leasing Value in Expanding Market

Leasing provides significant benefits to acquire capital assets without such large capital outlays.  Technology illustrates some unique value of leasing. See: Options to Lease, by Dan Flagstad, Risk Management Magazine (online).

Consider the following four reasons for leasing IT assets. Leasing can:

• Decrease cash commitments. Lessors who purchase IT assets generally understand the potential value and residual value, or lack of such value, in a given transaction. Using that knowledge, their appetite for tax benefits and their cost of funds, they can provide competitive rates to finance or lease these assets without the users making large capital outlays.

• Keep Pace with Change. Though many companies have invested in legacy systems where moving data to new systems remains problematic, technology improvements continue to advance relentlessly toward better and faster systems. According to Moore's Law, processing power will double every 18 months. Most IT leases, which extend 3 to 4 years, allow for some upgrades to keep pace with these changes without large additional cash expenditures by users.

• Provide Diverse Capital Sources. Companies can meet their IT spending requirements with investments from manufacturers, which have direct financing or leasing programs, or their captive finance companies, which provide leasing and financing apart from the sales operations. Captives dedicate their functions to facilitating sales, advancing strategic placements of their manufacturing products, and providing a one-stop shopping solution for customers to buy and finance equipment and software. Banks, independent leasing companies and other finance companies compete for business in this realm. In short, users have an array of choices to finance and lease IT investments.

• Improve IT Portfolio Management. Leasing provides IT managers a better way to manage their portfolios of assets and functions. They can often achieve reduced costs, increased services, and enhanced performance due to available upgrades and flexible lease terms. One of the most flexible tools that has emerged in the last few years is utility computing, explained below in Leasing 101. This method of acquiring IT assets enables a company to pay only for its actual uses of IT assets according to appropriate metrics.
  
  Even though Wall Street has focused on the bearish tendencies of stock prices of IT companies, IT spending has strengthened and shows promise over the next two years. Companies will acquire billions of dollars of new equipment and software to improve efficiency, security and competitive positions in their markets. According to the Equipment Leasing Association, leasing will provide an estimated $28 billion of IT leases by 2005. If CIOs have their way, IT spending will continue to expand, and leasing will play a significant role in this positive trend despite lingering doubts of senior management and Wall Street.

2. California Imposes New Use Taxes on Aircraft, Vehicles and Vessels

California's Governor Arnold Schwarzenegger, the "Terminator", signed a bill on August 16, 2004 to end a sales tax benefit for aircraft, vehicles and vessels for almost two years.

As part of California's revenue-raising provisions in the tax law, SB1100 amends Section 6248 of the Revenue and Taxation Code to impose use tax on aircraft, vehicles and vessels. The law does so by shifting a presumption as to when purchasers pay use tax. The net effect is to raise taxes in California on the backs of lessors and other owners of these assets.

Under the old rule, if a purchaser acquired an aircraft, vehicle or vessel outside of California and did not transport or bring it into California within the first 90 days after purchase, California presumed that the owner would not store, use or otherwise consume the property in California. Accordingly, California would not subject the property to use tax. To raise revenue, the 90-day presumption will now become twelve-months. As stated in the Legislative Digest to SB1100:

This bill would, until July 1, 2006, expand this presumption to a vehicle, vessel, or aircraft, if that vehicle, vessel, or aircraft is (1) purchased by a California resident, (2) subject to California's registration or property tax laws during the first 12 months of ownership, or (3) used or stored in this state more than 1/2 of the time during the first 12 months of ownership. See: Section 2 of SB 1100.

*Technical Point: The presumption that a purchaser acquires an aircraft, vehicle or vessel for storage, use or consumption in California may be disproved by documents such as registration of that vehicle, vessel or aircraft with the proper authority outside of California.

Understanding the implication of the rule, in the past, aircraft owners, for example, stored their aircraft outside California for the first 90 days to avoid paying the use tax. Thereafter, the owners could hangar the aircraft in California without paying the use tax.

*Action Item: This new rule takes effect after October 1, 2004. See: Section 6248(f). Consequently, if you intend to purchase an aircraft as the owner-operator or owner-lessor, you should enter into a binding contract or purchase the aircraft on or before October 1, 2004 to avoid the new, longer presumption period of twelve months. Play it safe; don't wait until October 1, 2004!

The new law will preserve exemptions from use tax when the purchaser uses the aircraft in interstate or foreign commerce for more than 50 percent of the period during the first 180 days after purchase of the aircraft. Further, the law will not apply to the repair, retrofit or modification of the aircraft or vessel and for up to 25 hours thereafter to leave California if the owner's purpose is to deliver or return the property outside of California. See: Section 6248(e)(2).

*Warning: While the rules described here may seem straightforward, the tax laws affecting aircraft, vehicles and vessels are not, and the rules here have been generalized in some respects. You should seek advice of a qualified professional to assist you. Be aware that California is aggressively seeking revenue in general. As a result, property, sales and use tax collection efforts may change the cost of storing, using or consuming vehicles, vessels and aircraft in California. As a lessor, you should carefully monitor sales, use and property taxes of your lessees to avoid the imposition of a lien on your property by any government entity in California. A tax lien may diminish the value of your investment or cause a lease default.

California has little choice but to raise revenue to balance its budget. Owners of vehicles, vessels and aircraft will do their part by paying more use taxes, at least through the end of June 2006.

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