Court Opinion

ID: 6755570
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:26:43.407006+00
Date Added: 2024-06-11T16:02:25.256206
License: Public Domain

Paul W. Brown, J.,
dissenting. The board’s decision in the instant case is both unreasonable and unlawful, and is neither supported by any evidence nor by the board’s own finding.
The “personal service exception” contained in R. C. 5739.01(B) excepts from sales taxation any inconsequential transfer of tangible personal property incidental to a personal service transaction. As I indicated in my dissent in United States Shoe Corp. v. Kosydar (1975), 41 Ohio St. 2d *15268, this exception must be seriously distorted before it can be construed to impose a tax upon a service transaction.
A transaction which consists of full service data processing of customer furnished information by the use of a computer program is a service transaction not subject to sales tax under the Ohio sales and use tax laws. Although the incidental delivery to the customer of a printed write-out of the data processing result of such a service, for which no separate charge is made, is a transfer of tangible personal property, its presence does not make the service transaction taxable. That the service contract is performed by persons rather than machines is of interest, in my view, only to the extent that it bears upon determination as to whether the service performed is personal in nature, thus excepting from taxation the incidental transfer of tangible personal property.
"Where the service is “personalized,” that is, where the charges are for processing customer furnished information (sales data, payroll data), other states having sales tax statutes similar to Ohio’s refer to the contractor as a “service bureau, ’ ’ and in clarifying tax regulations, either except the entire transaction from taxation or outline methods of computing only the taxable value of the incidental transfers of tangible personal property. In so doing, they generalize at the outset of each such regulation that charges for processing are not taxable, as opposed to stating that they are exempt.
One need not discuss exemption (or exception) where the tax does not apply.
Particularly noteworthy is Regulation 1502 of the Board of Equalization of the Department of Business Taxes of the state of California, which thoroughly and rationally regulates all automatic data processing service and equipment transactions in that state. That regulation provides answers to most of the problems involved in separating the service portion of such contracts from the property transfer portion, when taxable, and outlines methqds of determining fbq valqe qf the taxable pqrfiqn,
*153The California regulation is contained in its entirety at pages 4-9 of appendix 2-3.2d of 1 Bigelow, Computer Law Service (1975), State Sales and Use Taxes. That appendix also lists the attitudes of other state tax departments with reference to this problem. There, one finds the following tax department positions, state by state:

Connecticut

“Where a service bureau enters into a contract for the processing of customer-furnished information, by the use of a computer program or through an electrical accounting machine programmed by a wired plug-board, and the output is in part or in whole transferred to the customer in tabulated listing or similar human readable form, the true object of the contract is considered to be the rendition of a service, even though some tangible personal property is incidentally transferred to the client. Such contracts usually provide that the service bureau will receive the customer’s source documents, record data in machine readable form, such as in punched cards or on magnetic tape, make necessary corrections, process the information, and then provide tabulated listings or record output onto other similar media (including payroll cheek forms or cards or W-2 forms or tax returns). * * *” Id., at page 16.

Louisiana

“The furnishing for a monthly fee [of] computer printed accounting and accounts receivable and payable reports is a service of a type not subject to Louisiana sales tax.” Id., at page 36.

New York

“Services offered by computer operators, which consist of ‘* * * services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons, but excluding the furnishing of information which is personal or individual in nature # * *’ are taxable * * Id., at page 49.

Texas

• “ Processing of data, performing of accounting services (md eyahiatiqp of information when the information ip sup*154plied by the customer, or gathered for the customer, are services which are not taxed under the sales & use tax.” Id., at page 64.

Virginia

“Service bureaus in general provide tabulated listings developed from the customer’s source material and payroll checks and W-2 forms from payroll records. This is considered a nontaxable service even though some tangible personal property of an inconsequential nature is transferred to the customer.” Id., at page 74.

Washington

Sales of “custom” programs do not constitute “ ‘sales at retail’ but * * * are simply the tangible evidence of a professional service rendered.” Id., at page 76.

W isconsin

“Processing a client’s data. Generally speaking, if a person enters into a contract to process a client’s data by the use of a computer program, or through an electrical accounting machine programmed by a wired plugboard, the contracts are non-taxable (except if the contract is in the nature of a lease * * *). Such contracts usually provide that the person will receive the client’s source documents, record data in machine readable form, such as in punch cards or on magnetic tape, make necessary corrections, rearrange or create new information as the result of the processing and then provide tabulated listings or record output on other media. This service will be considered nontaxable even if the total charge is broken down into specific charges for each step. The furnishing of computer programs and data by the client for processing under direction and control of the person providing the service is nontaxable even though charges may be based on computer time. The true object of these contracts is considered to be a service, even though some tangible personal property is incidentally transferred to the client.” Id., at page 80.
With regard to Champion’s on-line activities for its savings and loan clients, I see no valid basis for holding tl).at spch actiyitips constitute a license to iise Champion’s *155computer, taxable under any part of the sales tax law. This is because Champion did not make such a transfer of possession or use of its computers to its clients dr their personnel as is necessary in order to make the transaction taxable under clear statutory language.
I would hold the board’s decision both unreasonable and unlawful. The consequences of the majority opinion and the confusion demonstrated by the court in its approach to this problem are regrettable.
W. Brown, J., concurs in foregoing dissenting opinion.