Board Holds That Computer Disks and Licenses Are Tangible Personal Property Subject to Sales and Use Tax
In Computer Services, Inc. et al. v. Department of Revenue, No. K07-R-18 (KBTA Dec. 22, 2008), the Kentucky Board of Tax Appeals (“Board”) held that software disks and the license to use them are “tangible personal property” and subject to sales and use tax.
Computer Services, Inc. (“CSI”) provides data management services to banking institutions. CSI utilized the Unisys Clearpath System to capture information from banking documents so it could retrieve such information in the case of a disaster or loss. CSI paid Unisys Corporation (“Unisys”) $3,663,717 for disks and licenses to use their software packages for 60 months, at the end of which, CSI was to return the software to Unisys.
The Department assessed sales and use tax upon CSI’s purchases of software from Unisys. Unisys paid sales tax on the purchase and sought a refund, which the Department denied. CSI and Unisys then appealed to the Board.
Under Kentucky law, sales tax applies only to transfers of tangible personal property and certain specifically enumerated services. Prior to 2003, the applicable statute defined “tangible personal property” as “personal property which may be seen, weighed, measured, felt or touched, or which is in any manner perceptible to the senses….”
According to the Board, the Department of Revenue (“Department”) classified CSI’s use of software as tangible personal property because such software was loaded on a tangible medium which was the only hardware upon which it could be used. In contrast, CSI claimed that it was the software that was being used and not the medium of delivery, and thus, the software itself was not tangible personal property.
The Board agreed with the Department and held that the software disks and licenses to use them constituted tangible personal property because “they fulfill a certain function in the banking industry the same as a lawnmower might in the landscaping industry.” The Board stated that such disks and licenses “do not constitute the knowledge of how the services are provided [….] They are, themselves the means of those services.” Accordingly, the Board upheld the Department’s sales and use tax assessment. The decision has limited application because the statutory definition of tangible property was amended in 2004 to include prewritten software.