Gilreath v. General Elec. Co.
751 So.2d 705, 2000 Fla. App. LEXIS 1135, 2000 WL 145956 (2000)
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Rule of Law:
Under Florida law, custom computer software is classified as intangible personal property, not tangible, and is therefore not subject to local ad valorem taxation by counties, whose authority is limited to taxing tangible personal property. The Florida Legislature's statutory definition and treatment of software for tax purposes, valuing it only to the extent of its physical medium, is a constitutional exercise of legislative power.
Facts:
- General Electric Company (GE) and Martin Marietta Corporation (Martin) developed and owned two prototype computer simulation systems, COMPU-SCENE VI for flight training and PT-2000 for tank driver training, which were built over several years in Volusia County, Florida.
- These prototypes consisted of complex custom software and the associated computer hardware, designed primarily as "proof of concept" systems to determine technical feasibility, not for resale.
- Between 1992 and 1994, the Volusia County facilities, including these prototypes, were transferred from GE to Martin.
- After production models of the simulators began to be sold, the prototypes were used by GE and Martin for some testing and demonstration purposes.
- In 1994, the simulator prototypes were sold for scrap value, totaling $8,700.
- In 1997, the Florida Legislature amended Section 192.001(19), Florida Statutes, to define "computer software" and exclude "embedded software," further stating that, after installation, computer software does not increase the value of computer equipment for property tax purposes.
Procedural Posture:
- For the 1992 tax year, General Electric Company (GE) timely filed its Tangible Personal Property Tax Return, initially including the COMPU-SCENE VI and PT-2000 prototypes at a high value, then filing an amended return valuing them significantly lower.
- The Volusia County Property Appraiser (Gilreath) assessed the prototypes for the 1992 tax year at a total value of $14,129,914.
- GE paid $266,564 in taxes under protest and unsuccessfully appealed the assessment to the Value Adjustment Board.
- GE then commenced Case No. 92-10367 in circuit court, challenging the assessment.
- For the 1993 tax year, the Property Appraiser again assessed a tangible personal property tax against the prototypes, then owned by Martin Marietta Corporation (Martin), valuing them higher than Martin's reported value.
- Martin's appeal to the Value Adjustment Board was denied, leading to Case No. 94-10343 being filed in circuit court.
- For the 1994 tax year, a similar assessment occurred, with the Property Appraiser valuing the prototypes significantly higher than Martin's reported scrap value, resulting in Case No. 94-11173 in circuit court.
- These three cases (92-10367, 94-10343, and 94-11173) were consolidated for a non-jury trial in the circuit court (trial court).
- The circuit court issued a final judgment determining that computer software is intangible personal property, that Section 192.001(19) is constitutional, and that the Property Appraiser's valuations were excessive, adjusting the taxable values for the prototypes.
- The Property Appraiser, Morgan Gilreath, appealed the circuit court's judgment to the District Court of Appeal of Florida, Fifth District.
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Issue:
Does custom computer software constitute tangible personal property subject to local ad valorem taxation by a Florida county, and is the Florida Legislature's statutory classification of software as primarily intangible personal property constitutional?
Opinions:
Majority - Dauksch, J.
No, custom computer software does not constitute tangible personal property subject to local ad valorem taxation, and the Florida Legislature's classification is constitutional. The court adopted the circuit court's judgment, which concluded that custom computer software is intangible personal property. The Florida Constitution limits local governments to taxing tangible personal property, reserving the taxation of intangible personal property to the State. The court determined that tangible personal property consists of goods whose chief value is intrinsic to the article itself, while intangible personal property's value is based on what it represents rather than its intrinsic value. Software, characterized as "imperceptible binary impulses" representing intellectual property, lacks intrinsic value; its essence is the information, not the tangible medium storing it. The court supported this view by citing a majority of sister state appellate courts. Furthermore, the 1997 amendment to Section 192.001(19), Florida Statutes, which clarifies that only the unmounted physical medium of software is taxable and software itself does not increase equipment value, was deemed a constitutional exercise of legislative power. The legislature holds "great freedom of classification" in taxation, and this amendment was considered rational and consistent with the state's constitutional authority over intangible property. Therefore, the Property Appraiser's assessments, which included the value of the custom software, were excessive.
Analysis:
This case provides crucial clarity regarding the taxation of computer software in Florida, distinguishing it as intangible personal property beyond the taxing authority of local counties. By upholding the legislative classification, the court reinforces the principle that tax laws must adapt to technological advancements and that legislatures possess broad power to define and classify property for tax purposes, provided such classifications are rational and do not usurp constitutional authority. The decision has significant implications for technology companies operating in Florida, potentially reducing their local property tax burdens and fostering innovation. It also serves as a guide for other jurisdictions grappling with the categorization of evolving digital assets within traditional property tax frameworks.
