Case Title: Ex parte Russell County Community Hospital, LLC, d/b/a Jack Hughston Memorial Hospital.

Citation: 

Docket Number: 1180204

State: alabama

Court: Alabama Supreme Court

Date: 2019-05-17T00:00:00Z

Document:
Rel:  May 17, 2019
Notice: This opinion is subject to formal revision before publication in the advance
sheets of Southern Reporter.  Readers are requested to notify the Reporter of Decisions,
Alabama Appellate Courts, 300 Dexter Avenue, Montgomery, Alabama 36104-3741 ((334)
229-0649), of any typographical or other errors, in order that corrections may be made
before the opinion is printed in Southern Reporter.
SUPREME COURT OF ALABAMA
OCTOBER TERM, 2018-2019
_________________________
1180204
_________________________
Ex parte Russell County Community Hospital, LLC, d/b/a Jack
Hughston Memorial Hospital
PETITION FOR WRIT OF CERTIORARI
TO THE COURT OF CIVIL APPEALS
(In re:  Russell County Community Hospital, LLC, d/b/a Jack
Hughston Memorial Hospital
v.
State Department of Revenue)
(Russell  Circuit Court, CV-16-900160;
Court of Civil Appeals, 2170527)
SELLERS, Justice.
1180204
This Court granted a petition for a writ of certiorari
seeking review of the Alabama Court of Civil Appeals' decision
affirming a judgment of the Russell Circuit Court ("the trial
court"), which ruled that a series of transactions involving
the sale of computer software and accompanying equipment was
subject to  sales tax.  See Russell Cty. Cmty. Hosp., LLC v.
State Dep't of Revenue, [Ms. 2170527, November 16, 2018] ___
So. 3d ___ (Ala. Civ. App. 2018).  We affirm the Court of
Civil Appeals' judgment.
Between February 2012 and October 2014, Medhost of
Tennessee, Inc. ("Medhost"), sold Russell County Community
Hospital, LLC, d/b/a Jack Hughston Memorial Hospital ("the
taxpayer"), computer software and accompanying equipment,
which Medhost contracted to install in a hospital operated by
the taxpayer.  The software and equipment assists the taxpayer
in operating various aspects of its hospital.  Medhost
collected a little less than $18,000 in sales tax in
connection with the transactions, which it remitted to the
Alabama Department of Revenue ("the Department").
Later, the taxpayer petitioned the Department for a
refund of the sales tax it had paid on the transactions with
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Medhost.  The Department denied that request, and the taxpayer
appealed to the Alabama Tax Tribunal ("the tax tribunal"),
which reversed the Department's decision and directed the
Department to grant the taxpayer's request for a refund.  The
Department then filed an action in the trial court requesting
de novo review of the tax tribunal's decision.  After a
hearing, during which testimony was presented ore tenus, the
trial court overturned the tax tribunal's decision and
affirmed the Department's denial of the taxpayer's refund
petition.1  The taxpayer appealed to the Court of Civil
Appeals, which affirmed the trial court's judgment.  We
granted the taxpayer's petition for a writ of certiorari.
In Alabama, sales tax is levied on the sale of tangible
personal property.  State Dep't of Revenue v. Wells Fargo Fin.
Acceptance Alabama, Inc., 19 So. 3d 892, 894 (Ala. Civ. App.
1Section 
40-2B-2(m)(4), 
Ala. 
Code 
1975, 
provides, 
in 
part,
that an "appeal to circuit court from a final or other
appealable order issued by the Alabama Tax Tribunal shall be
a trial de novo, except that the order shall be presumed prima
facie correct and the burden shall be on the appealing party
to prove otherwise."  The parties do not provide significant
argument as to the appropriate level of deference that a
circuit court must afford a final order of the tax tribunal or
as to which aspects of proceedings before the tax tribunal a
circuit court must hear de novo.  In its brief to this Court,
the taxpayer concedes that the ore tenus rule applies to the
trial court's findings.
3
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2008) (citing § 40-23-2(1), Ala. Code 1975).  This Court has
defined "tangible personal property" as "'something that can
be seen, felt, handled, sold commercially ... and has physical
substance.'"  State v. Advertiser Co., 257 Ala. 423, 429, 59
So. 2d 576, 580 (1952) (quoting a trial court's order with
approval).  See also Black's Law Dictionary 1412 (10th ed.
2014) (defining "tangible personal property" as "[c]orporeal
personal property of any kind; personal property that can be
seen, weighed, measured, felt, touched, or in any other way
perceived by the senses").
The Court has decided two appeals involving taxation in
connection with the sale of computer software.  The first,
decided in 1977, was State v. Central Computer Services, Inc.,
349 So. 2d 1160 (Ala. 1977).  The issue in that case was
stated broadly as "whether computer 'software' constitutes
tangible personal property for purposes of the state use tax." 
349 So. 2d at 1161.2  The software in Central Computer
Services had been conveyed to the software user via magnetic
tapes or punched cards that were "used to program [the user's]
2Section § 40-23-61(a), Ala. Code 1975, imposes a tax on,
among other things, "the storage, use or other consumption in
this state of tangible personal property."
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computer 
which 
provide[d] data 
processing 
services 
for 
banks." 
Id.  Upon receiving the tapes or cards, the user would
transfer the "information" contained thereon to the 
user's own
magnetic discs and would then return or discard the tapes and
cards.  This Court held that the software user had not
purchased tangible property.  Rather, "the essence of [the]
transaction was the purchase of nontaxable intangible
information."  349 So. 2d at 1162.  The Court determined that
the physical media that had been used to transfer that
"information" was incidental to the sale of the information. 
In support of that reasoning, the Court noted that "this
information can also be telephoned to the computer or brought
into Alabama in the mind of an employee of [the software
seller]."  Id.
Approximately 20 years later, in Wal-Mart Stores, Inc. v.
City of Mobile, 696 So. 2d 290 (Ala. 1996), this Court
considered the type of software that was being sold in Wal-
Mart retail discount stores in the mid 1990s, although the
Court broadly stated the issue as "whether computer software
is intangible personal property."  696 So. 2d at 290.  The
Court acknowledged that the reasoning underlying Central
5
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Computer Services was that the purchaser of software was
really purchasing intangible information.  The Court noted,
however, that, since that case was decided in 1977, "there
ha[d] been a shift in the view of many courts."  696 So. 2d at
291.
"One of the changes that has occurred in this
state 
and 
elsewhere, 
which 
was 
perhaps 
not
reasonably to be anticipated in 1977, is the
proliferation of 'canned' computer software, such as
is sold by stores like Wal–Mart. As a practical
matter, the marketing of such 'canned' software
presumes that the information sought will be
conveyed by way of a tangible medium. In this sense,
the merchandiser is making a sale of tangible
property, like the sale of a book."
696 So. 2d at 291 (emphasis omitted).  The Court thus relied
on an assumption that the "information" making up canned
software would necessarily be conveyed by way of a tangible
medium.  The Court, however, appeared to go further and to
suggest that the "information" itself is tangible once it is
recorded somewhere:
"'The software itself, i.e., the physical
copy, is not merely a right or an idea to
be comprehended by the understanding. The
purchaser of the computer software neither
desires nor receives mere knowledge, but
rather receives a certain arrangement of
matter that will make his or her computer
perform 
a 
desired 
function. 
This
arrangement of matter, physically recorded
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on some tangible medium, constitutes a
corporeal body.'"
669 So. 2d at 291 (quoting South Cent. Bell Tel. Co. v.
Barthelemy, 643 So. 2d 1240, 1246 (La. 1994) (emphasis
added)).
The taxpayer argues that this case, unlike Wal-Mart, does
not involve canned software.  Rather, the taxpayer asserts
that it purchased nontaxable services in the form of "custom
software 
programming." 
 
The 
taxpayer 
points 
to 
an
administrative 
regulation 
promulgated 
by 
the 
Department, 
which
provides, in part, that
"[c]ustom software programming is not subject to tax
regardless of the manner or medium of transfer to
the customer since the charge for the custom
software programming is a charge for professional
services and the manner or medium of transfer is
considered incidental to the sale of the service." 
Ala. Admin. Code (Dep't of Revenue), Reg. 810-6-1-.37(5) ("the
Regulation").3  The Regulation defines "custom software
programming" as "software programs created specifically for
one user and prepared to the special order of that user."  Id. 
3The 
Court 
notes 
that 
the 
Regulation provides 
further 
that
sales tax is to be collected "on the cost of the tangible
medium for transferring the 
custom software programming to the
customer."  Ala. Admin. Code (Dep't of Revenue), Reg.
810-6-1-.37(6).
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The term includes "programs that contain pre-existing
routines, utilities, or other program components that are
integrated in a unique way to the specifications of a specific
purchaser."  Id.  Custom software programming also includes
"modifications to a canned computer software program when such
modifications are prepared to the special order of the
customer," 
although 
"only 
to 
the 
extent 
of 
the
modification[s]" and only to the extent the modifications are
separately invoiced to the purchaser.  Id.  The Department
concedes in its brief to this Court that "there is no doubt
that paying someone to customize your software (or to write
new software from scratch) is exempt from sales tax as a
service."4
4The taxpayer asserts that the definition of "custom
software programming" in the Regulation is internally
inconsistent.  As noted, the Regulation provides that custom
software programming includes "modifications to a canned
computer 
software 
program 
when 
such 
modifications 
are 
prepared
to the special order of the customer."  Ala. Admin. Code
(Dep't of Revenue), Reg. 810-6-1-.37(5).  Also as noted, that
provision is subject to the proviso that such modifications
are nontaxable only to the extent of the modifications
themselves and only to the extent the modifications are
separately invoiced.  Id.  The taxpayer argues that the
proviso conflicts with the provision in the Regulation that
custom software programming "includes programs that contain
pre-existing routines, utilities, or other program components
that are integrated in a unique way to the specifications of
a specific purchaser."  Id.  We are not convinced, however, by
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Consistent with the Court's statements in Wal-Mart, we
hold that all software, including custom software created for
a particular user, is "tangible personal property" for
purposes of Alabama sales tax.  There are, however, nontaxable
services that can accompany the conveyance of software.  Those
services include, but are not limited to, determining a
particular software user's needs, designing and programming
new software for a particular user,5 modifying or configuring
the taxpayer's arguments that the cited portions of the
Regulation are necessarily inconsistent.  In any event, we are
not bound by administrative regulations.  See Ex parte
Chesnut, 208 So. 3d 624, 640 (Ala. 2016) (indicating that,
although the interpretation of a statute by an administrative
agency charged with enforcing the statute is entitled to
deference, courts will not "blindly follow" an interpretation
that is unreasonable or unsupported by law).  The taxpayer has
not persuasively demonstrated that any alleged internal
inconsistency in the Regulation prohibits the Department from
taking the position that sales tax was owed in connection with
the transactions at issue.
5As the Court of Civil Appeals acknowledged in State
Department of Revenue v. Omni Studio, LLC, 222 So. 3d 367, 371
(Ala. Civ. App. 2016):
"The amount of sales tax that a seller of
tangible personal property owes is calculated as a
percentage 
of 
'gross 
proceeds 
of 
sales.' 
§
40–23–2(1)[, Ala. Code 1975].  'Gross proceeds of
sales' is defined, in part, as '[t]he value
proceeding or accruing from the sale of tangible
personal property ... without any deduction on
account of ... labor or service cost ... or any
other expenses whatsoever....' Ala. Code 1975, §
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existing software programs to meet a particular user's needs,
installing software, and training users to operate software. 
If the costs of such services are separately stated and
invoiced, they are nontaxable.  Charges for the software
itself trigger the imposition of sales tax at the time the
sale closes and the software is transferred to the purchaser. 
Thus, there is no distinction for Alabama sales-tax
purposes between canned or custom software.  All software is
tangible personal property and thus subject to sales tax.  The
pertinent distinction is how the transaction is 
documented and
invoiced, and that is left strictly in the hands of the seller
and purchaser.  To the extent a seller tenders an invoice for
computer software, the gross amount allocated to 
that software
is subject to sales tax.  However, a seller's invoice for
40–23–1(a)(6)."
This Court, however, has recognized that the services of a
"learned professional," which ultimately result in the
incidental transfer of tangible property, can be nontaxable. 
See Haden v. McCarty, 275 Ala. 76, 78, 152 So.2d 141, 142
(1963) ("[T]he transfer of dentures and other prosthetic
devices from a dentist to his patient is not a sale within the
meaning of the [Sales Tax] Act. It is ... a mere incident to
the professional treatment rendered by dentists.").  We view
that proposition as applicable to the services involved in the
design and creation of new computer software for a particular
user.
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services such as those identified above, when separately
stated, is not subject to sales tax. 
In the present case, the testimony presented to the trial
court included that of Medhost's chairman and chief executive
officer, Bill Anderson.  Anderson's testimony supports a
conclusion that 
Medhost 
sold 
the 
taxpayer 
preexisting software
and equipment, which was available for purchase by any
hospital, and that Medhost thereafter "implemented" the
software and equipment at the taxpayer's hospital so that
hospital 
personnel 
could 
operate 
it 
efficiently. 
Implementation of the software consisted of a 
determination of
how the taxpayer's hospital functions; setting up 
hardware and
similar equipment; data entry and selection of "configuration
options" that exist within Medhost software to make it
function efficiently with the hospital's existing work flows,
software, and equipment; and training hospital personnel to
operate the computer system.
It appears undisputed that no sales tax was collected in
connection with the separately stated charges for 
the 
services
Medhost 
performed 
in 
implementing 
the 
software 
and
accompanying equipment.  In addition, the trial court found
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that the items for which Medhost did charge sales tax
constituted tangible property and not nontaxable services. 
Under the ore tenus rule, which the taxpayer has conceded is
applicable here, "a judgment based on [ore tenus] evidence is
presumed to be correct and will not be disturbed on appeal
unless a consideration of the evidence and all reasonable
inferences therefrom reveals that the judgment is plainly and
palpably erroneous or manifestly unjust."  Arzonico v. Wells,
589 So. 2d 152, 153 (Ala. 1991).  Under that standard, the
evidence is sufficient to support the trial court's judgment. 
Accordingly, the Court of Civil Appeals correctly affirmed
that judgment, and we affirm its judgment.
AFFIRMED. 
Mendheim, J., concurs.
Parker, C.J., and Bolin, Shaw, Stewart, and Mitchell,
JJ., concur in the result.
Bryan, J., dissents.
12
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BOLIN, Justice (concurring in the result).
I concur in the result. I agree that there is no
distinction for Alabama sales-tax purposes between canned and
custom software -- both are tangible personal property and
subject to taxation.  The main opinion notes that the
pertinent distinction in determining taxability is how the
transaction regarding sale of the software and the services
rendered is documented, and that decision is left strictly in
the hands of the seller and purchaser.  I write specially to
encourage the legislature to clarify how a transaction
involving software and services is to be documented and
invoiced.  It should not be left to private entities to
determine the taxability of a transaction for the State of
Alabama.  
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SHAW, Justice (concurring in the result).
I concur in the result.  
As noted in the main opinion, the parties dispute whether
the computer software at issue in this case is taxable as
"tangible personal property" under Alabama law.  See Ala. Code
1975, § 40-23-2(1).  In Wal-Mart Stores, Inc. v. City of
Mobile, 696 So. 2d 290, 291 (Ala. 1996), this Court overruled
State v. Central Computer Services, Inc., 349 So. 2d 1160
(Ala. 1977), and held that computer software is tangible
personal property.  Wal-Mart spoke in terms of "canned"
software; in that case, the software at issue was apparently
sold in the retail context directly to the consumer "by way of
a tangible medium."  696 So. 2d at 291. 
Regulations subsequently promulgated by the Alabama
Department of Revenue ("the Department") drew a distinction
between the "canned" software identified in Wal-Mart and
software that is customized for the consumer.  The
customization of software or the creation of new software
specifically for one consumer, the regulations appear to
presume, are services that are not taxed.
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However, the evidence in the record in the instant case
shows that Russell County Community Hospital, LLC, d/b/a Jack
Hughston Memorial Hospital ("the taxpayer"), purchased
software and paid a tax on that software.  As the Court of
Civil 
Appeals 
noted: 
"According 
to 
[the 
software
manufacturer's witness], the software at issue was purchased
initially as a product that was available to multiple
customers and was later implemented to meet the taxpayer's
specifications.  Thus, at the time the software was chosen and
purchased by the taxpayer," the software was not "customized
computer software" as that term is defined in the Department's
regulations.  Russell Cty. Cmty. Hosp., LLC v. State Dep't of
Revenue, [Ms. 2170527, Nov. 16, 2018] ___ So. 3d ___, ___
(Ala. Civ. App. 2018) (emphasis added).  After the purchase,
the manufacturer of the software "implemented its software
products to meet the individual needs of the taxpayer." 
Russell Cty. Cmty. Hosp, ___ So. 3d at ___.  The taxpayer
separately paid for those services, which were not taxed.  It
appears to me that the evidence supports the Court of Civil
Appeals' 
determination.  
Essentially, 
under 
the 
terminology of
the regulations, the evidence shows that "canned" software was
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purchased and a tax paid; the subsequent "implementation" of
the software, to the extent that implementation would be
considered modification or customization of the software, or
otherwise a service, was not taxed.  
Under the facts of this case, I do not believe we are
presented with the need to discern distinctions between
"canned" 
and 
"customized" computer 
software 
and 
the 
apparently
hazy area in between.  It further appears to me that our prior
caselaw dealing with distinctions between products and
services, such as in the creation of dentures, Haden v.
McCarty, 275 Ala. 76, 78, 152 So. 2d 141, 142 (1963), and when
the transfer of property is an incidental part of services
provided, Ex parte State of Alabama Department of Revenue, 222
So. 3d 375, 377 (Ala. 2016) (Shaw, J., dissenting) (discussing
cases where "some transfers of tangible personal property are
considered 'incidental' to the provision of services and are
not taxed"), may not be appropriate in dealing with rapidly
changing technology.6  The legislature, which "has the
exclusive domain to formulate public policy in Alabama," is
best equipped to define tangible personal property and to
6The decision in Wal-Mart does not address these
distinctions.
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clarify any distinctions as to what should and should not be
taxed; otherwise, uncertainty for taxpayers and artful
invoicing will overshadow this State's tax policy.  Boles v.
Parris, 952 So. 2d 364, 367 (Ala. 2006).
Stewart, J., concurs. 
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BRYAN, Justice (dissenting).
The issue in this case is whether the software and the
implementation of that software purchased by Russell County
Community 
Hospital, 
LLC, 
d/b/a 
Jack 
Hughston 
Memorial 
Hospital
("the taxpayer"), is "custom software programming" under
Regulation 810-6-1-.37(5), Ala. Admin. Code (Dep't of
Revenue).  Custom software programming is distinct from
"canned software," which, under Regulation 810-6-1-.37(4), is
considered tangible personal property and thus is subject to
sales tax.  Custom software programming is not considered to
be personal tangible property and thus is not subject to sales
tax.  Reg. 810-6-1-.37(5).  The key regulation, Reg. 810-6-1-
.37(5), defines "custom software programming":
"The term 'custom software programming' as used in
this regulation shall mean software programs created
specifically for one user and prepared to the
special order of that user.  The term 'custom
software programming' also includes programs that
contain pre-existing routines, utilities, or other
program components that are integrated in a unique
way to the specifications of a specific purchaser.
Custom software programming also includes those
services represented by separately stated charges
for modifications to a canned computer software
program when such modifications are prepared to the
special order of the customer.  Modification to a
canned computer software program to meet the
customer's needs is custom software programming only
to the extent of the modification.  Custom software
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programming is not subject to tax regardless of the
manner or medium of transfer to the customer since
the charge for the custom software programming is a
charge for professional services and the manner or
medium of transfer is considered incidental to the
sale of the service."
This regulation is the basis of some dispute in this
case.  The Alabama Tax Tribunal, in ruling that the
transaction at issue was nontaxable, stated that the
regulation contains contradictory provisions.  The Russell
Circuit Court did not directly address the regulation in its
judgment overturning the tax tribunal's decision.  The Court
of Civil Appeals, in affirming the circuit court's judgment,
disagreed with the tax tribunal's statement that the
provisions of the regulation are contradictory.  And now, the
main opinion, in affirming the judgment of the Court of Civil
Appeals, states that it is unconvinced that the regulation
contains contradictory provisions.  ___ So. 3d at ___ n.4.
However, it does not appear to me that the main opinion
relies on the regulation in reaching its decision to affirm
the judgment of the Court of Civil Appeals.  The main opinion
"hold[s] that all software, including custom software created
for a particular user, is 'tangible personal property' for
purposes of Alabama sales tax" but that "nontaxable services
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... can accompany the conveyance of software."  ___ So. 3d at
___.  Thus, the main opinion draws a bright-line distinction
between software itself (of all types), which is taxable, and
certain services related to 
the 
software, which are nontaxable
if the services are separately stated and invoiced.  That
distinction regarding services basically reflects the third,
fourth, and fifth sentences of Regulation 810-6-1-.37(5),
which, as noted, provide:
"Custom software programming also includes those
services represented by separately stated charges
for modifications to a canned computer software
program when such modifications are prepared to the
special order of the customer.  Modification to a
canned computer software program to meet the
customer's needs is custom software programming only
to the extent of the modification.  Custom software
programming is not subject to tax regardless of the
manner or medium of transfer to the customer since
the charge for the custom software programming is a
charge for professional services and the manner or
medium of transfer is considered incidental to the
sale of the service."
However, by holding that "all software, including  custom
software created for a particular user, is 'tangible personal
property' for purposes of Alabama sales tax," ___ So. 3d at
___ (emphasis added), the main opinion seems to essentially
excise the first two sentences of the regulation.  As noted,
the first sentence provides that "[t]he term 'custom software
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programming' as used in this regulation shall mean software
programs created specifically for one user and prepared to the
special order of that user."  Reg. 810-6-1-.37(5) (emphasis
added).  The second sentence of the regulation similarly
provides that "[t]he term 'custom software programming' also
includes 
programs 
that 
contain 
pre-existing 
routines,
utilities, or other program components that are integrated in
a unique way to the specifications of a specific purchaser." 
(Emphasis added.)  It is unclear to me whether the main
opinion intends to 
essentially excise these two sentences, but
that seems to be the consequence of the opinion. 
If the main opinion essentially reworks a part of the
regulation and excises the remainder, it provides no 
rationale
for doing so.  The main opinion does state that "we are not
bound by administrative regulations," ___ So. 3d at ___ n.4,
and cites Ex parte Chesnut, 208 So. 3d 624, 640 (Ala. 2016),
for that proposition; however, that proposition does not
follow from Chesnut.  Chesnut states that, although we give
weight to an administrative agency's interpretation of its own
regulation, we are not bound by that interpretation.  208 So.
3d at 640 ("'Although a court should give deference to an
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agency's interpretation of an agency rule or a statute
implemented by the agency, that deference has limits.'" 
(quoting Alabama Dep't of Revenue v. American Equity Inv. Life
Ins. Co., 169 So. 3d 1069, 1074 (Ala. Civ. App. 2015))).  In
saying that we are not bound by regulations, the main opinion
seems to 
conflate a regulation with an agency's interpretation
of the regulation.  Regulations, of course, have the force of
law and are "binding" on everyone, including this Court, in
that sense.  See Ex parte Wilbanks Health Care Servs., Inc.,
986 So. 2d 422, 424 (Ala. 2007) ("'Rules, regulations, and
general orders of administrative authorities pursuant to
powers delegated to them have the force and effect of laws
when they are of statewide application and so promulgated that
information of their nature and effect is readily available or
has become part of common knowledge.'"  (quoting Hand v. State
Dep't of Human Res., 548 So. 2d 171, 173 (Ala. Civ. App.
1988))).  However, if a regulation is inconsistent with the
underlying statute on which it is based, the regulation is not
"good law" and thus is not binding.  See Ex parte Southeast
Alabama Med. Ctr., 835 So. 2d 1042, 1052 n.10 (Ala. Civ. App.
2002) ("An administrative regulation must be consistent with
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the statute pursuant to which it was promulgated; it cannot
usurp legislative power, and may neither subvert nor enlarge
upon statutory policy.").  This Court, of course, may decide
whether a regulation is inconsistent with the underlying
statute.  However, the main opinion does not explicitly state
that any part of Regulation 810-6-1-.37(5) runs afoul of any
particular statute. Indeed, none of the parties appear to ask
us to make such a decision.   
As I have explained, it does not appear to me that the
main opinion exactly applies Regulation 810-6-1-.37(5).  What
are we to do with that regulation?  None of the parties appear
to ask us to decide whether the regulation conflicts with any
statute.  Accordingly, I would simply try to apply the
regulation as best we can to the facts here.  In addition to
the facts and the plain language of the regulation itself, my
review is informed by a few points.  First, although the
circuit court held a trial "de novo" pursuant to §
40-2B-2(m)(4), Ala. Code 1975, the tax tribunal's order that
was appealed to that court is to "be presumed prima facie
correct." § 40-2B-2(m)(4).  The Department of Revenue ("the
Department") had the burden of proving that the tax tribunal's
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order in favor of the taxpayer was wrong.  Id.  Further,
Regulation 810-6-1-.37(5) provides the definition of "custom
software programing" to articulate the meaning of tangible
personal property, i.e., what is taxable, in the field of
software.  That is, the regulation helps define tangible
personal property by defining what does not fit into that
category.  
Definitional 
tax-levying 
statutes 
must 
be 
construed
in favor of the taxpayer.  State v. Reynolds Metals Co., 263
Ala. 657, 661, 83 So. 2d 709, 711-12 (1955).  Although this
case centers on a regulation and not a statute, I believe the
same rule of construction would logically apply to the
regulation, which, as noted, has the force of law.
The Department argues that Regulation 810-6-1-.37(5)
addresses only "custom software programming," i.e., the act of
creating "a sequence of instructions to enable a computer to
do something."  The Department's brief at 20.  The Department
argues that Regulation 810-6-1-.37(5) does not address
software itself, i.e., the product created by the programming. 
Thus, the Department contends, the software purchased by the
taxpayer does not fall under the definition in the regulation
of what is nontaxable.  However, recognizing that, "in a
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narrow sense, 'software' is synonymous with 'program,'"
Wal-Mart Stores, Inc. v. City of Mobile, 696 So. 2d 290, 291
n.1 (Ala. 1996), I struggle to see how the regulation, in
addition to services, does not also address certain "software"
that is customized for purchasers.  The first sentence of the
regulation 
states 
that 
"[t]he 
term 
'custom 
software
programming' ... shall mean software programs created
specifically for one user and prepared to the special order of
that user."  Similarly, the second sentence provides that
"[t]he term 'custom software programming' also includes
programs that contain pre-existing routines, utilities, or
other program components that are integrated in a unique way
to the specifications of a specific purchaser."  This is the
key sentence on which the taxpayer relies in arguing that the
programs it purchased from Medhost of Tennessee, Inc.
("Medhost"), are nontaxable programs under the regulation.  I
believe the evidence in this case supports the taxpayer's
argument, as I will explain below.
Bill Anderson, the chairman and chief executive officer
of Medhost, testified at trial about the health-care software
Medhost sold the taxpayer.  Anderson explained that Medhost
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engages in a thorough implementation process designed to make
the software work properly with each hospital that buys the
software.  Anderson said that simply loading the software at
the hospital, without additional steps, "would be very
inefficient for 
the 
customer," 
and, 
that, 
therefore, 
Medhost's
software is "highly configurable."  Anderson explained that,
"as part of the implementation process, we ... go in and meet
with members of the hospital, determine how their work flows
work, and then we change various software switches to try to
accommodate, as closely as possible, how the hospital likes to
conduct business."  Anderson further explained: "There is,
also, a fairly extensive discovery effort where we go and sit
down with the hospital as to how they actually run the
hospital, and then to the extent possible, we configure our
software to meet ... how they actually do things."  Anderson
stated that part of the implementation process involves
ensuring that Medhost's software is "appropriately configured
to work with the other  modules [that hospitals] already
have."
Anderson further testified about how the implementation
process is a customized process:
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"A.
[W]e do a custom implementation.  There is no
doubt about that.
"Q.
[By counsel for the taxpayer:] Okay.  Each
implementation you do is customized for each
hospital?
"A.
Correct.  That is the whole purpose of the,
kind of, discovery phase so that we understand
how to configure the hospital to -- and I will
use the word, from a generic standpoint, to
customize it for the work flows in the
hospital."
Anderson also testified about how long a hospital should
expect the installation process to take.  He stated that the
entire installation process, which includes the training of
hospital personnel, should normally take roughly six months
beginning from the day the contract is signed.  Anderson
further 
testified 
that 
health-care 
software 
is 
"very
complicated."  When asked to compare Medhost's software with
standard tax software sold in retail stores, Anderson stated
that the standard tax software "is not complex at all compared
to what we do."  He also noted that "tax software is much less
configurable than health care IT software."  Anderson
testified that implementation of Medhost's software is "much
more complex" than simply adding hospital letterheads and
other hospital-specific information to forms.  Anderson
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observed that "people pay hundreds of thousands, if not
millions, of dollars to implement" this type of software.
Anderson's 
testimony 
indicates 
that 
one 
of 
the
definitions of nontaxable "custom software programming" under
Regulation 810-6-1-.37(5) was satisfied here.  The definition
"includes programs that contain pre-existing routines,
utilities, or other program components that are integrated in
a unique way to the specifications of a specific purchaser." 
Anderson's testimony indicates that this happened here. 
Regarding the first part of the above-quoted provision, the
programs Medhost sells certainly contain "pre-existing
routines, utilities, or other program components."  
The second
part of the provision –– the components are integrated in a
unique way to the specifications of a specific purchaser –– is
satisfied also.  Anderson testified that the software, or
programs, were "highly configurable," complex programs that
were configured to meet the taxpayer's specific needs.  The
implementation of the programs is lengthy, expensive, and
customized.  It is also essential, because without it the
software would be "very inefficient" for the taxpayer. 
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Thus, I agree with the tax tribunal's conclusion that a
sales tax should not have been levied on the taxpayer in this
case.  I believe that the plain language of the regulation
supports the tax tribunal's decision.  Insofar as the language
of the regulation as a whole may be unclear –– and it has
caused some confusion in this case –– I would construe the
regulation against 
the 
Department, 
i.e., 
the 
taxing 
authority.
Reynolds Metals, 263 Ala. at 661, 83 So. 2d at 711-12.7 
Accordingly, I respectfully dissent.  
    
 
 
7I agree with Justice Shaw that the legislature is best
equipped to clarify what should and should not be taxed in
this field.
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