Opinion ID: 2438023
Heading Depth: 1
Heading Rank: 3

Heading: The Taxpayer's Software Purchases

Text: A distinct segment of the case has to do with the purchase by the taxpayer of computer software for use in its own system. The director claimed that such purchases were subject to Missouri sales or use tax. The Administrative Hearing Commission disagreed as to software delivered by telephone, and by magnetic tape which the taxpayer was obliged to return to the supplier after using it to program its system. It sustained the assessment as to software delivered on magnetic tapes, floppy disks, or punchcards which the taxpayer retained and which the commission found to consist of programs which were canned rather than custom, in that they were held for sale to those who might desire them and were not specially created to meet a particular customer's specifications or requirements. We believe that the Commission's finding on this portion of the case is supported by substantial evidence on the record as a whole, and sustain its decision. The taxpayer cites James v. Tres Computer Service, Inc., 642 S.W.2d 347 (Mo. banc 1982); and K & A Litho Process v. Director of Revenue, 653 S.W.2d 195 (Mo. banc 1983), which involved custom creations on media of relatively small value. There the Court concluded that the media of transmission, magnetic tape in the former case and color film transparencies in the latter, were of relatively small value and were incidental to the primary purpose of the transaction. These holdings were refined in International Business Machines v. Director of Revenue, 765 S.W.2d 611 (Mo. banc 1989), in which the seller-taxpayer had a stock of computer programs on disk, diskette, tape, and punched cards. The Court held that the sale of these programs was a sale of tangible personal property, even though the programs were sometimes subjected to minor modifications to meet the particular purchaser's needs, and even though the purchaser was instructed to make copies so as to provide a backup but to return the original to the seller after loading it into its computers. The director has promulgated regulations on the basis of the distinction between Tres and IBM. We are troubled by the Administrative Hearing Commission's apparent assumption that these regulations have the force and effect of law which it is powerless to depart from. Taxes may be authorized only by statute, and the director may not add to, subtract from, or modify the revenue statutes by regulation. [2] The Commission's citation of State Tax Commission v. Administrative Hearing Commission, 641 S.W.2d 69 (Mo. banc 1982), is utterly misplaced. That case held simply that the legislature could not give the Commission the authority to render a declaratory judgment as to the validity of rules of the State Tax Commission. When review of decisions of the Director of Revenue is sought the Commission must resort to the statutes and has full authority to reach a decision on the law as it finds it, subject, of course, to judicial review. The Commission, however, has found explicitly that the programs as to which it sustained the assessment were not custom programs but rather stock items, so that IBM rather than Tres was the governing authority. This finding is supported by sound law and substantial evidence, and we sustain it. The taxpayer argues that the blank magnetic tapes and floppy disks have only minimal value, and that the purchaser is interested in the programs rather than the disks and tapes, which may be discarded after their initial use. Under IBM this circumstance is not controlling. In Hearst Corp. v. Director of Revenue, 779 S.W.2d 557 (Mo. banc 1989), we held that the director's position that the sale of a newspaper was not a sale of tangible personal property, because the newsprint was simply a means of transmitting information, was legally unsound. The commission properly found that the challenged items were acquired through sales of tangible personal property, and so were subject to sales and use tax.