Tax Type
Property Tax
Description
Tangible Personal Property Classified for Local Taxation;Computer Software
Topic
Property Subject to Tax
Date Issued
09-08-1983
You have asked whether computer software is tangible personal property subject to local taxation. You have supplemented your question with additional information narrowing your question to circumstances where the computer software is in tangible form, stored on discs or tapes, has been purchased or leased for exclusiive use and not for resale, has been sold or leased separate and apart from a transaction involving the sale or lease of computer hardware and it consists of an applicational computer program as opposed to a basic operational program.
This is apparently a question of first impression in Virginia and represents, perhaps, only the beginning of a series of legal questions in a rapidly growing field of informational technology. It is, indeed, a field in which the law lags behind the creative forces of intellectual and commercial development. In view of this, I have reviewed definitional concepts, marketing techniques and practices and the status of emerging case development in other states before reaching my conclusions. Nevertheless, this subject of emerging interest and concern should require the attention of the General Assembly.
It is clear from this exhaustive and time-consuming review that, to the uninitiated, computer language is as "foreign' as it is sometimes devoid of form.
"Software' is an imprecise term which has no generally accepted meaning within the data processing business. For purposes of this opinion and in order to coincide with the facts which you have presented, "software' will mean computer instructions in a form which may be read by a machine from either a tape or disc storage medium.
"Applicational programs' may be characterized as computer software designed to do specific jobs such as bookkeeping, billing and statistical analysis. This type of software may be distinguished from basic-operational programs which equip the computer's central processing unit with the essential instructions to control input and output of the computer and to schedule the priority of its functions.
Because the software has been sold apart from the sale of hardware, the sale or lease of the hardware and the software was not "bundled.' That is, the initial transaction is not completed for a single price without differentiating the cost of the hardware and the software.
We may further describe the software according to one of three categories. It may be "canned' software, which is sometimes referred to as "prewritten,' "off-the-shelf' or "standard' programs. This type of software is sold without significant alteration to a variety of customers and is often mass produced. The second category is described as "custom' software and it consists of original computer programs specially created to the customer's specifications. The third category is a hybrid of the first two known as "customized' software, also referred to as "rewritten' or "modified.' This type of software is usually "canned' software which is tailored to the needs of a specific customer. There may also be combinations and permutations of these three categories. Even canned programs will ordinarily require some adaption to meet specific needs.
Generally, if software constitutes tangible personal property, it will be subject to local taxation.1 If software is intangible personal property, it will either be subject only to State taxation or it will be exempt from both State and local taxation.2
There are a number of law review articles analyzing the subject of ad valorem taxation of computer software. Taxation as tangible personal property is almost universally opposed by the writers of those articles who urge that such software is intangible personal property.3
Some states have enacted specific legislation defining software as tangible personal property or as intangible personal property for certain taxes,principally in the sales tax area.4 Ignoring those distinctions, California pescribes the criteria for taxing software as tangible personal property in terms of applicational and basic operational programs.5 Virginia, unlike some other states, does not have legislation giving precise direction on the subject of the taxation of computer software.
We begin our examination of the Virginia statutes with Ch. 16, Title 58, §§58-829 et seq. None of the classification statutes in that chapter identifies computer software as a specific category or classification of tangible personal property. § 58-830 provides:
- "No property shall be assessed as tangible personal property which the law classifies as intangible personal property.'
Intangible personal property is defined by §§58-405 and 58-833. Those sections do not specifically define or classify computer software.6
Because the software you have described is personal property in tangible form, is not specifically defined as intangible personal property, and is not classified as a specific type of tangible personal property, I initially conclude that the software comes within the category of tangible personal property and is classified under §58-829(M) which reads:
- "All tangible personal property employed in a trade or business other than that defined as intangible personal property under Chapter 8 (§58-405 et seq.) of this title or §58-833, or described in subsections A through L of this section or in §58-831, which shall be valued by means of a percentage or percentages of original cost.'
However, without specific statutory guidance, we should look elsewhere to confirm the conclusion that this is the proper classification of software.
In the absence of specific statutory definition, a number of courts in sister jurisdictions have held software to be intangible personal property, claiming that it is the information which is desired, not the tangible personal property itself which has relatively insignificant value.7 Some of these decisions have relied upon prior decisions of the same courts in the context of sales tax imposed on the sale of tangible personal property.8
A number of courts have discussed the necessity of the tangible personal property medium for transmitting the information as a basis for distinguishing personal property deemed tangible from that which is intangible. These courts have held sales taxes to apply to movie film because the tangible nature of the film is essential to the transmission of the artists' performance.9
Conversely, the same courts find that tapes, cards, discs or drums are not essential to the transmission of software because the information contained thereon could be transmitted by purely intangible electronic means.10 In the context of advanced technology, videotapes and videodiscs, this distinction is no longer tenable.
A very recent decision of the Supreme Court of Vermont likens canned "computer program tape [to] other taxable personal property such as films, videotapes, books, cassettes and records. In each, their value lies in their respective abilities to store and later display or transmit their contents. A computer software tape is no different.' Chittenden Trust Company v. King, Vt., A.2d (Docket No. 82-294, August 12, 1983). See, also, Comptroller v. Equitable Trust Company, Md. , A 2d (Docket No. 147, August 11, 1983) slip op., p. 14. Decided the day before the Vermont decision, the Maryland decision also was unable to distinguish computer tapes from books, motion picture films, video display discs, phono-records and music tapes.
I am persuaded that the view adopted by Vermont and Maryland is the better reasoned view, one free of artificial distinctions based upon intellectual property concepts. It is undisputed that intangible intellectual property developed by authors, musicians, inventors and similar occupations becomes tangible personal property when reduced to books, phonograph records or tapes, consumer products and other usable forms of property. Equitable Trust Company, supra, slip op., p. 13. As the Vermont Supreme Court noted, canned computer software is no different.
Maryland, with an ad valorem system of tangible and intangible property taxation similar to Virginia's, has also had its highest court express the view that software is tangible personal property subject to taxation under its law. Greyhound Computer Corporation v. State Department of Assessments and Taxation, 271 Md. 674, 679, 320 A.2d 52, 55 (1974).
The Supreme Court of Virginia has not decided a case involving the issue of whether computer software is tangible personal property or intangible personal property. Although caution must be exercised when seeking an interpretation relating to one type of tax by looking to an analagous interpretation in another tax, the comparison is often profitable. I am advised that the State Tax Commissioner has rendered administrative case decisions under the authority of §58-1119 of the Code in which he held the sale of computer software to be subject to the Virginia Sales and Use Tax as a sale of tangible personal property. Under the appropriate facts and circumstances, such a determination is consistent with the "true object' test prescribed by the Supreme Court of Virginia in WTAR Radio-TV Corp. v. Commonwealth, 217 Va. 877, 234 S.E.2d 245 (1977).11 Moreover, the interpretation of a statute by the official charged with its administration is entitled to great weight. Commonwealth v. Research Analysis, 214 Va. 161, 163, 198 S.E.2d 622, 624 (1973).
Ohio courts are often looked to for decisions with respect to the Virginia Sales and Use Tax. WTAR Radio-TV Corp., 217 Va. at 883. The Ohio Supreme Court has applied the "true object' test to data processing services and enunciated the following distinction: if the real purpose of the acquisition is to acquire the processed data itself and not the personal services of the seller's programmers, then the transaction is the sale of tangible personal property. If the true object of the transaction is to acquire the personal services of the seller's programmers and the transfer of the tangible medium is an inconsequential element of the transaction, there is no sale of tangible personal property. Accountants' Computer Services v. Kosydar, 35 Ohio St. 2d 120, 298 N.E.2d 519 (1973). This ruling has been extended to computer software by the Ohio Board of Tax Appeals. NCR Corp. v. Lindley, Ohio Board of Tax Appeals, No. 78-D-221, August 4, 1980; The Cleveland Trust Company v. Lindley, Ohio Board of Tax Appeals, No. E-2011, August 30, 1977.
As I have indicated in footnote 11, the "true object' test is specifically applicable only to a sales transaction which involves mixed elements of value attributable to both tangible personal property and personal services. In the case of canned computer software, there is generally no element of personal service. The personal service which led to the development of the canned computer software was rendered at a time remote from the sale.12 The product is now mass-produced and sold off-the-shelf without the inclusion of any personal service. Thus, the intangible nature of a computer programmer's personal service does not affect the determination whether canned computer software is tangible personal property. See Chittenden Trust Company v. King, supra, slip op., p. 4 (Vermont's version of the "true object' test, the "focus of transaction' analysis, does not apply to the sale of canned computer software); Comptroller v. Equitable Trust Company, supra, slip op., pp. 13-14 (Maryland's version of the "true object' test, the "dominant purpose' test, does not apply when personal services are not part of the transaction).
Both Vermont and Maryland rejected arguments of the taxpayer that the programs, though actually transferred in the tangible form of tapes, could have been transferred by an intangible medium such as telephone lines. If the programs are in tangible form, what might have been done is irrelevant to the tax consequences of the actual transaction. Chittenden Trust Co., supra, slip op., p. 5; Equitable Trust Company, supra, slip op., pp. 17, 31.
Lastly, some mention should be made of the arrangement where the transfer of the tangible tapes is effected pursuant to a licensing agreement under which the "seller' retains legal title to the computer program tapes. Such an agreement typically creates contractual limitations upon the purchaser's rights to use, copy or make further sale of the tapes. The Maryland high court rejected the argument that what passed between the parties were merely intangible rights. In fact, the court held that such licenses convey no intangible rights at all and that the property passing is purely tangible. Equitable Trust Co., supra, slip op., pp. 10-11.
Under the facts and circumstances which you have presented, it is apparent that the buyer or lessee of a canned, applicational program has acquired the tapes or discs themselves and not the personal services of the programmers who originally created the program for mass production. The transfer of the tapes or discs provides an essential piece of equipment to be used with a computer, and the sale or lease does not merely incorporate an inconsequential transfer of personal property. Thus, it is myopinion that computer software, consisting of canned, applicational programs sold or leased in the form of discs or tapes, is tangible personal property subject to local taxation.
"SF1 Article X, §4 of the Constitution of Virginia (1971); §58-9 of the Code of Virginia."EF
"SF2 Art. X, §6(a)(5) of the Constitution; §58-10 of the Code."EF
"SF3 See Bryant & Mather, Property Taxation of Computer Software, 18 N.Y.L.F. 59 (1972); Heinzman, Computer Software: Should It Be Treated As Tangible Property For Ad Valorem Tax?, 37 J. Tax. 184 (1972); Martin, The Revolt Against Property Tax On Software, 9 Suffolk U.L.Rev. 118 (1974); see, also, Tunick, Computer Law: An Overview, 13 Loy. L.A.L. Rev. 315, 320-325 (1979)."EF
"SF4 See, e.g., Conn. Gen. Stat. §12-407(2)(c) and (g) (tangible); Kan. Stat. §79-3603(s) (tangible); Or. Rev.Stat. §307.020(1) (intangible); and Tenn. Code Ann. §67-3002(b) (tangible)."EF
"SF5 Cal. Rev. & Tax. Code §§995 et seq. (West Supp. 1974)."EF
"SF6 According to §58-405(D), if the software were classified as intangible personal property other than inventory defined in §58-405(A)(1), it would be exempt from taxation."EF
"SF7 See, e.g., Honeywell Informations Systems, Inc. v. Maricopa County, 575 P.2d 821 (Ariz. Ct. App. 1978); District of Columbia v. Universal Computer Associates, Inc., 465 F.2d 615, 617 (D.C. Cir. 1972)."EF
"SF8 See, e.g., Universal Computer Associates, Inc., supra, relying upon Washington Times-Herald v. District of Columbia, 213 F.2d 23, 24 (D.C. Cir. 1954) (holding cartoon mats sold by publishing syndicates to individual newspapers not subject to sales tax)."EF
"SF9 Boswell v. Paramount Television Sales, Inc., 291 Ala. 490, 282 So.2d 892 (1973); Cresent Amusement Co. v. Carson, 187 Tenn. 112, 213 S.W.2d 27 (1948)."EF
"SF10 State v. Central Computer Services, Inc., 349 So.2d 1160 (Ala. 1977), Commerce Union Bank v. Tidwell, 538 S.W.2d 405 (Tenn. 1976)."EF
"SF11 The "true object' test is used in sales and use tax contexts to determine whether a sale transaction is a sale of tangible personal property when it consists of elements of value attributable to both tangible personal property and the rendition of personal services. A sale of personal services is not taxable whereas a sale of tangible personal property is taxable."EF
"SF12 Comptroller v. Equitable Trust Company, Md. , A.2d (Docket No. 147, August 11, 1983) slip op., p. 13."EF
Attorney General's Opinion