CompuServe, Inc. v. Lindley

• Decision Date: 27 October 1987
• Docket Number: Nos. 86AP-376,86AP-377,s. 86AP-376
• Citation: CompuServe, Inc. v. Lindley, 41 Ohio App.3d 260, 535 N.E.2d 360 (Ohio App. 1987)
• Parties: COMPUSERVE, INC., Appellant, v. LINDLEY, Appellee.
• Court: Ohio Court of Appeals

Page 260

41 Ohio App.3d 260

535 N.E.2d 360

COMPUSERVE, INC., Appellant, v. LINDLEY, Appellee.

Nos. 86AP-376, 86AP-377.

Court of Appeals of Ohio, Tenth District, Franklin County.

Decided Oct. 27, 1987.

Syllabus by the Court

1. The value of operating systems computer software should be included and taxed as part of the true value of the tangible computer hardware served by it for purposes of assessing the business personal property tax imposed by R.C. 5709.01(B)(1), as the computer hardware cannot function without the systems software. However, applications software may not be so taxed, as such software is not essential to the computer's operability and, therefore, does not enhance its value.

2. Computer software, being intangible property, is not subject to the sales tax imposed by former R.C. 5739.02, or to the use tax imposed by former R.C. 5741.02(A).

Bricker & Eckler and Charles F. Glander, Columbus, for appellant.

Anthony J. Celebrezze, Jr., Atty. Gen., and Christine Mesirow, Columbus, for appellee.

BADGER, Judge.

This is an appeal by appellant, CompuServe, Inc., from two decisions by the Ohio Board of Tax Appeals, holding that appellant's computer software was tangible property subject to the Ohio sales, use and business personal property taxes.

The two Ohio Board of Tax Appeals ("BTA") decisions regarding the taxability of appellant's computer software were consolidated on appeal to this court. One decision involved business personal property tax assessments issued by appellee, the Ohio Tax Commissioner, to appellant for the tax year 1980. Appellant had included the costs of its computer software as other taxable intangibles under Schedule 10 of appellant's 1980 Ohio corporation return of taxable property. Appellee deleted the software costs from Schedule 10 and listed and taxed these costs as part of the true value of appellant's computer hardware under Schedule 4 of appellant's return. Appellant appealed appellee's decision to the BTA on taxing the software as tangible business personal property pursuant to R.C. 5709.01(B)(1), instead of taxing it as "other taxable intangibles" as defined in R.C. 5701.09. The BTA upheld treatment of the software costs as part of the value of appellant's tangible computer hardware. The BTA based its decision on the fact that the software was stored on tangible computer tapes, and that the software rendered the computer hardware operable, thereby enhancing the hardware's value.

The second BTA decision consolidated in this court for appeal involved a sales and use tax assessment, under R.C. 5739.02 and 5741.02, issued to appellant by appellee for the period of September 1, 1976 through August 31, 1979. On appeal to the BTA, appellant objected to this sales and use tax assessment which related to appellant's acquisition of computer software, the licensing of software, and the execution of agreements for the development of software. The BTA affirmed the sales and use tax assessment finding that the true object of each transaction was the receipt of tangible personal property, and that the accompanying personal services rendered by the authors of the software were an inconsequential element of each transaction.

Appellant contends that, when it purchased the software, it was purchasing intangible information produced by personal services and that the tangible tapes were only an inconsequential aspect of the transactions. Therefore, appellant has timely appealed the BTA's decisions and asserts the following assignments of error.

As to the business personal property tax assessed:

"I. The Decision and Order of the Board of Tax Appeals is unreasonable and unlawful because it affirms the Tax Commissioner's assessment of computer software information which is not tangible property and, therefore, is not subject to taxation as tangible personal property in this State.

"II. The Decision and Order of the Board of Tax Appeals is unreasonable and unlawful, in that it is against the manifest weight of the evidence."

As to the sales and use tax assessed:

"I. The Decision and Order of the Board of Tax Appeals is unreasonable and unlawful because it affirmed the assessment of sales and use taxes upon the acquisition of computer software information, the licensing of computer software information and the execution of consulting agreements related to the development of computer software information, all of which are exempt from sales and use taxation in this State because such transactions do not involve the sale of tangible personal property.

"II. The Decision and Order of the Board of Tax Appeals is unreasonable and unlawful because it affirms the assessment of sales and use taxes upon the acquisition of computer software information, the licensing of computer software information and execution of consulting agreements related to the development of computer software information, all of which are exempt from sales and use taxation in this State because such transactions are personal services transactions within the meaning of Revised Code Sections 5739.01 and 5741.01.

"III. The Decision and Order of the Board of Tax Appeals is unreasonable and unlawful in that it is against the manifest weight of the evidence."

Appellant is an Ohio corporation which maintains a large bank of computers in its mid-Ohio headquarters and has branch offices throughout the United States. Appellant states that it provides computer-related services for the informational requirements of corporations, governments and individuals; and appellant's major functions are offering access to large central computers, computer software information, communication networks, and professional consultants. According to appellant, its customers access appellant's computer network by dialing a local telephone number which connects the customer to a local communication processor, a piece of hardware. This processor, appellant states, through its operating systems software, directs the customer to the proper applications software which solves the customer's informational problem in the central computer located at appellant's headquarters. Appellant says that the customer directs the computer's operation in analyzing the customer's question and that appellant does not process customer data. Appellant charges its customers by: (1) the amount of time the customer is connected with the computer; (2) the number of computer instructions the customer used in operating the computer; and (3) the amount of information the customer stores on peripheral computer devices.

Appellant states that computer hardware consists of a central processing unit, memory and peripherals such as disk drives and printers. Appellant defines "computer software" as an electronic set of instructions that causes computers to perform a particular task. Appellant specifies that there are two major types of software: operating systems ("systems") software and applications software. Systems software, appellant states, is used to instruct the computer on how to attack a problem, basically telling the computer how to operate. Appellant's systems software includes communications software used to connect remote users to the central processor. Applications software, according to appellant, is designed to solve a particular problem or perform a particular task and is dependent upon systems software to function.

Appellant says it has obtained its software from various sources. Some of appellant's software has been created by appellant's staff and some software has been written pursuant to agreements with non-employee computer software authors. Appellant testified that, when software is written by non-employee authors, appellant pays a license fee, a royalty based on usage, or a combination of both, to these authors to obtain the right for appellant and appellant's customers to use the software. Appellant also states that most of the non-employee authors appellant uses contract to continue consulting and maintenance on the software they have created.

According to appellant, in designing computer software the author begins by analyzing the problem to be solved. At some point, the author "writes" the software information in computer language. The parties have stipulated that the software information can be transmitted into the computer's memory without the use of a physical medium, such as a tape. Appellant states that the most common ways of placing the information into the computer's memory are: (1) by typing it on the computer terminal's keyboard; (2) by electronically transferring it from a remote terminal keyboard through a communication line such as a telephone line; and (3) transferring it to inexpensive storage devices, such as disks or tapes. Most of the software which appellant had purchased for its use was bought on tapes. Appellant says it also stores software on disks and tapes.

Tangibility of Computer Software

Appellant asserts that computer software is not tangible property. Ohio's business personal property tax, under R.C. 5709.01(B)(1), sales tax, under R.C. 5739.02, ¹ and use tax, pursuant to R.C. 5741.02, all taxed only tangible personal property at the time of the assessments in question, subject to certain exceptions. R.C. 5701.03 defines "personal property" to include "every tangible thing which is the subject of ownership, whether animate or inanimate * * *." The Ohio Revised Code does not define "tangible property." "Other taxable intangibles" is defined under R.C. 5701.09 as "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, inclusive, of the Revised Code." Computer software is not specifically discussed in any of the definitions in R.C. 5701.01 to 5701.09 and would not fall within any of the categories therein, unless software is determined to be a tangible item or to enhance the value of a tangible item.

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