South Cent. Bell Telephone v. Barthelemy
1994 La. LEXIS 2455, 36 A.L.R. 5th 689, 643 So.2d 1240 (1994)
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Rule of Law:
Computer software, once it is recorded in a physical form on a tangible medium such as a magnetic tape, disk, or computer hard drive, constitutes tangible personal property and is subject to sales and use tax. The method of delivery, whether physically on a storage device or electronically, does not alter its tangible nature once it is stored in a physical form.
Facts:
- South Central Bell Telephone Co. (Bell) operated a telephone system in Orleans Parish, which utilized computer-operated switching equipment in sixteen central offices.
- Bell licensed specialized switching system software from vendors, which was delivered on magnetic tapes.
- Once received, the switching software was loaded from the tapes onto Bell's computer processors at its central offices.
- Bell also licensed data processing software for its accounting and billing functions at its data processing center in Orleans Parish.
- The data processing software was transmitted electronically via telephone lines and a modem from an out-of-state affiliate and stored on Bell's computers.
- The license agreements for both types of software limited Bell's use and reserved ownership and proprietary rights to the vendors.
- Bell also acquired maintenance services for the software, which consisted of updating, enhancing, and technical support.
Procedural Posture:
- Following an audit, the City of New Orleans issued a tax deficiency assessment against South Central Bell (Bell).
- Bell paid the tax under protest and subsequently filed suit in district court seeking a refund.
- The district court granted summary judgment for Bell, ruling that the software was intangible and not subject to the city's use tax.
- The district court later amended its judgment to also find that the related maintenance services were not taxable.
- The City of New Orleans, as appellant, appealed to the Louisiana Fourth Circuit Court of Appeal.
- The Court of Appeal affirmed the district court's decision, holding that software is intangible intellectual property.
- The City of New Orleans then successfully applied for a writ of certiorari from the Supreme Court of Louisiana.
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Issue:
Does computer software, whether delivered on magnetic tapes or transmitted electronically, constitute 'tangible personal property' subject to the City of New Orleans' sales and use tax?
Opinions:
Majority - Hall, J.
Yes, computer software constitutes tangible personal property. The City Code's definition of 'tangible personal property' is synonymous with 'corporeal movable property' under the Louisiana Civil Code, which includes things that have a body and are perceptible to the senses. Although the 'knowledge' or 'information' within the software is intangible, once it is recorded in a physical form on a medium like a tape or hard drive, it becomes a corporeal body. The court reasoned that the software is not merely an idea but a specific arrangement of matter that makes a computer perform functions. The method of delivery is irrelevant; the tax attaches when the software comes to rest in a physical, recorded form within the city. The court explicitly rejected the distinction between 'canned' and 'custom' software as vague and irrelevant to its tangible nature. It also distinguished the incorporeal copyright (the intellectual property right) from the corporeal copy of the software, which is what Bell acquired and used. However, the court found the maintenance services were not taxable as 'repairs,' because they enhanced existing software rather than fixing something broken.
Dissenting in part - Watson, J.
No, not all software is tangible personal property. The justice concurs that software delivered on a physical medium like a magnetic tape is taxable because its value is tied to the tangible object. However, the justice dissents regarding the software transmitted electronically over telephone wires. This method of delivery is distinct from transferring a physical object, and the logic of taxing a physical medium cannot be logically stretched to include data transmitted electronically, which should not be considered 'tangible personal property'.
Analysis:
This decision established a significant precedent in Louisiana by classifying software as tangible goods for tax purposes, aligning with a modern trend across jurisdictions. By rejecting the 'essence of the transaction,' 'method of delivery,' and 'canned vs. custom' distinctions, the court created a broad, bright-line rule. The ruling focuses solely on whether the software is recorded in a physical medium, making it easier for tax authorities to administer taxes on digital products. This case significantly impacts the software industry, clarifying that the licensing of software for use within the jurisdiction is a taxable event, regardless of how the software is delivered to the end-user, as long as it is stored and used in a physical form.
