Court Opinion

ID: 9728558
Source: CourtListenerOpinion
Date Created: 2023-08-26 14:11:00.535805+00
Date Added: 2024-06-11T18:25:49.706624
License: Public Domain

Justice EAKIN,
dissenting.
Because I do not agree with the majority’s characterization of a license to use canned software programs as tangible personal property, I must dissent.
The debate on whether licensed software is considered tangible property is ongoing and has resulted in views as *353divergent as the technological variations addressed. Alas, the debate also tends to reflect a generational lack of understanding of that technology by courts and legislatures; however, we must answer the present question based on what the legislature said, not what we think the legislature meant to say. When the law is clear, the legislature’s intent is not relevant.
Some jurisdictions hold such software is taxable when the tape or disc on which it is delivered is an essential part of the program; the tangible container makes the product taxable. See Comptroller of the Treasury v. Equitable Trust Co., 296 Md. 459, 464 A.2d 248, 260-61 (1983) (noting loading of software program from tape into computer does not sever program from its container; once loading occurs, program exists both on tape and in computer). These jurisdictions reject the “essence of the transaction” test, focusing instead on the fact the program is delivered via a tangible container. See Chittenden Trust Co. v. King, 143 Vt. 271, 465 A.2d 1100, 1102 (1983) (comparing canned software to films, videotapes, books, cassettes, and records, where container and its content are inseparable).
Other jurisdictions have adopted the “essence of the transaction” test, holding the “essence” of purchasing software is the “software itself, not the tangible medium on which the software might be stored.” Dallas Cent. Appraisal Dist. v. Tech Data Corp., 930 S.W.2d 119, 123 (Tex.Ct.App.1996). See also Northeast Datacom, Inc. v. City of Wallingford, 212 Conn. 639, 563 A.2d 688, 691 (1989) (tapes or discs used to contain software were only most tangential incidents of computer program); CompuServe, Inc. v. Lindley, 41 Ohio App.3d 260, 535 N.E.2d 360, 365 (1987) (holding purpose of purchasing software is to obtain computer information which consists of electronic impulses transmitted into computer’s memory, not tangible disc used to transfer such impulses). Some of these jurisdictions have observed that, unlike movies, compact discs, and books, the information on a disc containing a software program is separable from the disc; the information is the substance of the transaction, and may be transferred by means other than the disc. See First National Bank of *354Springfield v. Department of Revenue, 85 Ill.2d 84, 51 Ill.Dec. 667, 421 N.E.2d 175, 178 (1981) (purchaser is buying information itself, not tangible property transferring such information).
South Central Bell Telephone Co. v. Barthelemy, 643 So.2d 1240 (La.1994), is the sole decision in which a court has applied the “essence of the transaction” test to canned software and found it to be tangible property. Graham Packaging Co., LP v. Commonwealth, 882 A.2d 1076 (Pa.Cmwlth. 2005), on which the majority relies, adopted South Central Bell’s observation that “[t]he software ... is knowledge recorded in a physical form which has physical existence, takes up space on the tape, disc, or hard drive, makes physical things happen, and can be perceived by the senses.” South Central Bell, at 1246; cf. Graham Packaging, at 1086-87 (canned computer software is “an electronic copy of a computer program that is stored on a computer’s hardware, takes up space on the hard drive and can be physically perceived by checking the computer’s files.”).
I agree with the Graham Packaging court that the “essence of the transaction test is the most logical and practical,]” as “it is the nature of the software itself [and] not the packaging in which it comes in” which is the pertinent inquiry for purposes of taxing tangible property, id., at 1086. However, I do not agree with its conclusion that the software at issue here is tangible — it is not “stored” on the computer.
Although the purchaser of canned software obtains the right to use the copy of the software, this is not a physical thing. It is a set of instructions to the computer in the form of binary pulses configured in the computer’s memory; as such, they do not “take up space” as Graham Packaging suggests, but instead simply reorder the configuration of electrons already on the computer. The informational reorganization dictates specific functions for the computer to perform. See First National Bank of Springfield, 51 Ill.Dec. 667, 421 N.E.2d at 176 (distinguishing between operation programs, which control hardware and make computer operate, and thus are part of machine, from application programs, which only perform spe*355cifíc functions once information is received by computer). The “fact that tangible property is used to store or transmit the software’s binary instructions does not change the character of what is fundamentally a classic form of intellectual property.” Northeast Datacom Inc., at 691.
Many, including myself, have labored over the conceptual problem: the very nature of the software itself. If one thinks of “adding” a program to a computer, one thinks of putting some additional physical thing on it, even if it is microscopic electronic code. However, this too often is our mistake. Licensed preprogrammed software does not add a thing to a computer — the software merely rearranges what is already there. It does not, as many jurists have incorrectly stated, “take up space on the hard drive.” Those electrons the software reorganized do exist there, but they already existed — they have just been reconfigured without addition. The way the computer operates has been changed, but it has not been given any additional electrons — its existing dormant electrons have been given a new purpose.
It is much like golf. New clubs are tangible — they may or may not change one’s ability to put the ball in the hole, but they are tangible additions. However, a golf lesson is not. The things that enable the swing have always been there, and the lesson (hopefully) improves the swing — the preexisting muscles simply initiate a modified series of actions consistent with the golf pro’s instruction. Nothing tangible has been added to the golfer. Computers, which follow instructions better than the average golfer, accept the new directions from the software without exception, but that does not transform the instructions themselves into tangible personal property.
Like the aftermath of having one’s company listen to a motivational speaker, the results may be tangible, but the lessons themselves are not. Accordingly, I would conclude a license to reconfigure one’s existing computer electrons via canned software does not involve tangible property, and is thus not subject to sales tax pursuant to 72 P.S. § 7202(a); accordingly, I would reverse the Commonwealth Court.