Court Opinion

ID: 6788840
Source: CourtListenerOpinion
Date Created: 2022-07-21 01:07:36.737571+00
Date Added: 2024-06-11T16:03:00.565046
License: Public Domain

O’Donnell, J.,
dissenting.
{¶ 26} Respectfully, I dissent.
*400{¶ 27} While the majority carefully details the viewpoints expressed by the parties and correctly notes that the Tax Commissioner relies upon our decision in Community Mut. Ins. Co. v. Tracy (1995), 73 Ohio St.3d 371, 653 N.E.2d 220, and that the taxpayer, the Andrew Jergens Company, relies upon CompuServe v. Lindley (1987), 41 Ohio App.3d 260, 266, 535 N.E.2d 360, the majority does not address the distinction drawn in CompuServe by the appellate court, i.e., the difference between system software and applications software. In my view, the outcome of this case should turn on this distinction.
{¶ 28} The court in CompuServe explained that system software is essential to the functioning of the computer and that because it affects the value of the equipment on which it is installed, it is subject to the Ohio personal property tax. This conclusion follows from the general proposition that “intangible incidental costs which enhance the value of tangible business personal property are considered part of the true value of the business personal property for tax purposes.” Id., 41 Ohio App.3d at 266, 535 N.E.2d 360. Thus, the intrinsic nature of the relationship between system software and the hardware on which it operates compels the treatment of system software as part of the equipment.
{¶ 29} On the other hand, applications software, which is at issue here, is not essential to the operation of the equipment, but permits the operator to perform individual functions pertinent to a particular task. Id., 41 Ohio App.3d at 267, 535 N.E.2d 360. Applications software has value independent of the hardware on which it operates. Until today, this distinction had been recognized in the field. Until this case arose, the commissioner has never before classified applications software as tangible personal property.
{¶ 30} The majority reaches its decision by emphasizing that “the encoded instructions are always stored on a tangible medium that has physical existence.” With respect to applications software, however, I concur with the statement of the court in Gilreath v. Gen. Elec. Co. (Fla.App.2000), 751 So.2d 705, 708, that “the essence of the property is the software itself, and not the tangible medium on which the software might be stored.”
{¶ 31} In this case, Jergens argues that it has a license to use intellectual property that is owned by another. This correctly characterizes a purchase of applications software. Jergens purchased the intangible information for use on its computers, and “ ‘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.’ ” Id. at 709, quoting Northeast Datacom, Inc. v. Wallingford (1989), 212 Conn. 639, 644, 563 A.2d 688. The applications software in this case does not fall into the realm of tangible personal property and should not be subject to that tax.
Jones Day and Charles M. Steines, for appellant.
Jim Petro, Attorney General, and Barton A. Hubbard, Assistant Attorney General, for appellee.
{¶ 32} The personal property tax applies to “[a]ll personal property located and used in business in this state.” R.C. 5709.01. The Revised Code defines “personal property” to include “every tangible thing that is the subject of ownership, whether animate or inanimate * * * that does not constitute real property.” R.C. 5701.03. We have applied this tax to such items as taximeters and two-way radios installed in motor vehicles, Taxicabs of Cincinnati, Inc. v. Peck (1954), 161 Ohio St. 508, 53 O.O. 378, 120 N.E.2d 86, and slot machines, Capitol Novelty Co., Ltd. v. Evatt (1945), 145 Ohio St. 205, 30 O.O. 418, 61 N.E.2d 211.
{¶ 33} In contract, R.C. 5709.02, which describes the intangible personal property tax, provides, “All money, credits, investments, deposits, and other intangible property of persons residing in this state shall be subject to taxation * * The General Assembly has defined “other intangible property” to include “every valuable right, title, or interest not comprised within or expressly excluded from any of the other definitions set forth in sections 5701.01 to 5701.09” of the Revised Code. R.C. 5701.09. This definition includes, for example, items such as a patent-licensing agreement. Beckett v. Tax Commr. (1965), 7 Ohio App.2d 181, 36 O.O.2d 314, 219 N.E.2d 305. In Beckett, the parties reduced a patent-licensing agreement to written form, i.e., “a tangible medium that has physical existence.” The physical existence of a written contract, however, did not render the underlying intellectual property tangible for tax purposes. The same reasoning should apply here.
{¶ 34} Based on the foregoing, applications software should not be subject to taxation as tangible personal property.
Pfeifer and Lundberg Stratton, JJ., concur in the foregoing dissenting opinion.