South Cent. Bell Telephone Co. v. Barthelemy

Citation643 So.2d 1240
Parties94-0499 La
Decision Date17 October 1994
CourtSupreme Court of Louisiana

Page 1240

643 So.2d 1240
94-0499 La. 10/17/94, 36 A.L.R.5th 689
Sidney J. BARTHELEMY, et al.
No. 94-C-0499.
Supreme Court of Louisiana.
Oct. 17, 1994.
Rehearing Denied Dec. 15, 1994.

Page 1241

Gregory D. Guth, Bruce E. Naccari, Kathy L. Torregano, Joseph N. Naccari, Avis M. Russell, New Orleans, for applicants.

William M. Backstrom, Jr., Edward D. Wegmann, Rosemarie Falcone, Keith G. Landry, New Orleans, for defendant.

[94-0499 La. 1] HALL, Justice. *

We granted writs in this case to decide whether certain computer software constitutes "tangible personal property" taxable under the sales and use tax imposed by the City of New Orleans pursuant to Section 56 of the City Code. The district court classified the two types of computer software at issue--switching system and data processing software--as intangible, nontaxable property, and thus granted partial summary judgment in favor of the taxpayer, South Central Bell Telephone Co. (Bell). The court of appeal affirmed. We classify computer software as tangible, taxable property, and thus reverse and remand.


During the pertinent taxing periods, January 1, 1986 through April 30, 1990, Bell operated a telephone system in Orleans Parish. As part of its system, Bell set up in the parish sixteen telephone central offices. Each telephone central office is a system, in and [94-0499 La. 2] of itself, as well as part of the larger telephone system. Simply put, each central office is a place where the caller's telephone line is connected to the line of the person being called, if that person is served by the same central office, or, if not, to a line connected to another telephone central office. Depending upon the location of the person being called, a given call may pass through multiple central offices.

Each central office consists of, among other things, switching equipment. Switching equipment includes computer processors that are directed and operated by computer software programs. Each central office is unique; consequently, each central office requires specifically tailored software designed to meet that office's operations. 1

During the pertinent taxing periods, Bell licensed specific switching system software programs for use in specific central offices pursuant to license agreements confected out of state with three vendors, AT & T Technologies, Inc., Northern Telecomm and Erickson. Under these license agreements, Bell acquired the limited right to use such switching system software programs; the license agreements limited Bell's right to use designated switching system software to designated

Page 1242

switches in designated telephone central offices. More particularly, the license agreements prohibited Bell's transfer of such software to any switch other than the designated one; prohibited Bell's sublicense, assignment, sale or transfer of the programs; prohibited Bell's use of the programs after the license expired; and required that Bell maintain strict confidentiality with regard to the programs. The license agreements also reserved to the vendors ownership of, and proprietary rights in, the switching system software programs.

[94-0499 La. 3] The vendors delivered the switching system software programs to Bell via magnetic tapes. Once received, the software programs were loaded onto Bell's switching system processors, and the magnetic tapes were either used or discarded. The vendors either billed Bell for City taxes on the magnetic tapes, or Bell automatically accrued such taxes on the magnetic tapes. Bell was neither billed by the vendors, nor accrued such taxes on the switching system software itself, however. The switching system software is thus one of the two types of software at issue in this case.

The second type of software at issue in this case is data processing software. This software guides the functions of the computers located in Bell's data processing center in Orleans Parish. Bell's data processing center handles basic accounting functions, including processing customer billings and payments, storing and managing customer data and maintaining a voucher and disbursement system. Bell acquired the right to use the data processing software through its affiliate, BellSouth Services, Inc. (BellSouth). BellSouth entered into a master license agreement regarding the software out of state. BellSouth also tested, evaluated and adapted the software out of state. BellSouth then transmitted the software electronically via telephone lines to Bell's modem in Orleans Parish. As with the switching system software, the license agreements limited Bell's rights to use the software and reserved to the vendors ownership of, and proprietary rights in, the data processing software.

Bell also acquired certain maintenance services in relation to both types of software. Those services consisted of updating, enhancing and reformatting the software, and advising Bell with respect to certain usages of the software.

The taxes at issue in this case are use taxes levied by the City on Bell's use of the two types of software programs under [94-0499 La. 4] § 56-21 of the City Code, and sales taxes levied by the City on Bell's payment for the related maintenance services under §§ 56-21 and 56-15(7) of the City Code.

In October 1990, following an audit, the City notified Bell of a proposed tax deficiency assessment for, among other things, Bell's use of the two types of computer software and Bell's payment for maintenance services for such software during the pertinent taxable period. Bell paid the full amount of the proposed tax deficiency under protest. 2 Thereafter, in November 1990, Bell commenced the instant action, seeking to recover the taxes paid under protest and contending that the items at issue were not taxable under the pertinent provisions of the City Code.

Each party filed cross-motions for summary judgment. After a hearing on the motions, the trial court denied the City's motion and granted Bell's motion in part, finding "that the sale/use tax of the City of New Orleans is not applicable to the licensing of the data process[ing] software or to the switching software." In written reasons for judgment, the district court stated "that under the essence of transaction test" neither

Page 1243

type of software at issue was taxable. Bell then filed a motion for amended judgment. Granting Bell's motion, the district court found "that the sale/use tax of the City of New Orleans is not applicable to the maintenance of software," and granted judgment in favor of Bell for the sum of taxes paid under protest.

Affirming, the court of appeal reasoned that computer software does not fall within the definition of "tangible personal property"; rather, it falls within the definition of incorporeal [94-0499 La. 5] property as it constitutes "intellectual property." In support of the latter conclusion, the court cited jurisprudence from other jurisdictions holding that computer software is intangible because the essence of the transaction is the acquisition of intangible information or knowledge. South Cent. Bell Tel. Co. v. Barthelemy, 93-1072, p. 5 (La.App. 4th Cir. 1/27/94), 631 So.2d 1340, 1343. Likewise, the court found that since the maintenance services related to such intangible property and did not constitute "repairs," such services were not subject to the City's sales tax. Id. at 8-9, 631 So.2d at 1344-45.

On the City's writ application, we granted certiorari to consider the correctness of that decision. 94-0499 (La. 4/29/94), 637 So.2d 451. 3


The city use tax is imposed by § 56-21 of the Code of the City of New Orleans:

There is hereby levied, for general municipal purposes, a tax upon the sale at retail, the use, the consumption, the distribution and the storage for use or consumption in the city of each item or article of tangible personal property, upon the lease or rental of such property and upon the sale of services within the city....

"Tangible personal property" is defined in § 56-18 of the City Code as follows:

[P]ersonal property which may be seen, weighed, measured, felt or touched, or is in any other manner perceptible to the senses. The term "tangible personal property" shall not include stocks, bonds, notes or other obligations or securities.

Construing this provision, we held in City of New Orleans v. Baumer Foods, Inc., 532 So.2d 1381 (La.1988), that "the term [94-0499 La. 6] 'tangible personal property' in the City Code's use tax is synonymous with corporeal movable property as used in the Louisiana Civil Code." 532 So.2d at 1383. See also St. John the Baptist Parish Sch. Bd. v. Marbury-Patillo Constr. Co., 259 La. 1133, 254 So.2d 607, 612 (1971); Sales Tax Collector, St. Charles Parish v. Westside Sand Co., 534 So.2d 454, 456 (La.App. 5th Cir.1988); McNamara v. Stauffer Chem. Co., 506 So.2d 1252 (La.App. 1st Cir.1987); Exxon Corp. v. Traigle, 353 So.2d 314, 316-17 (La.App. 1st Cir.1977); American Sign & Indicator Corp. v. City of Lake Charles, 320 So.2d 234, 236 (La.App. 3d Cir.1975). The application of property law concepts in this tax context is an exception to the general rule that tax laws are sui generis, B. Oreck, Louisiana Sales & Use Taxation § 2.2 (1992) (hereinafter Oreck). The reasoning behind applying property concepts in such a tax context is that the use of the common law term "tangible personal property" by the legislature, or by the various political subdivisions, was not intended to import the common law into Louisiana for purposes of sales and use tax law, nor to require the development of an entirely new body of property law for sales and use tax purposes only, but rather, the term was intended to be interpreted consistently with our civilian property concepts embodied in the Civil Code. Baumer Foods, Inc., 532 So.2d at 1383, n. 4 (citing Exxon Corp., 353 So.2d at 316-17); Westside Sand Co., 454 So.2d at 456; Stauffer Chem. Co., 506 So.2d at 1258.


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