Section 7 Computer Software

• Library: Tax Law 2009

Computer software has been the focus of a considerable classification controversy for some time. Initially, MoDOR took the position that computer software was tangible personal property subject to sales or use tax whether it was custom developed for a particular user or generally available as a standardized, “off-the-shelf” product. Sellers and users of software were dissatisfied with this position and challenged it.

In James v. TRES Computer Sys., Inc., 642 S.W.2d 347 (Mo. banc 1982), the Supreme Court first addressed this issue. At an AHC hearing, the parties stipulated that:

• the TRES On-Line Customer Information System (data), a custom-designed computer software program, was intangible property

• the tapes containing the data were tangible personal property

• TRES could have transmitted the data directly to the customer using electronic telecommunication

• although TRES sold its Missouri customer a perpetual nonexclusive license for the software, it did not authorize the customer to sell or otherwise to convey the software to others; and

• the retail value of the blank tapes was $50, and the purchase price of the software—the tapes on which the data was recorded—was approximately $135,000

The AHC held that the transaction was a sale of intangible technical professional services and not of tangible personal property and that the use of the data on the tapes was not the use of tangible personal property.

As summarized in the Court’s opinion, MoDOR’s position on appeal was that the software was taxable as tangible personal property because the data and programs were inseparable from the tapes containing them. TRES Computer Systems, Inc., contended that the tapes were mere conduits for the intangible professional services. Id. at 348.

After reviewing the manner in which the highest courts of the states of Alabama, Illinois, Tennessee, and Texas analyzed and disposed of the issue and declaring its intention not to “formulate a fixed, general rule which later could have unpredictable results,” the Court set forth the analysis by which it concluded that the software before the Court in TRES Computer was not use-taxable tangible personal property. Id. at 349.

The Court’s criterion was that the tapes themselves were not the ultimate object of the sale. It reasoned that the customer purchased the tapes only for their data and program content, stressing that the tapes were but a medium to convey such information. Having conveyed the information...