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Dechert LLP v. Commonwealth

July 20, 2010

DECHERT LLP, APPELLANT
v.
COMMONWEALTH OF PENNSYLVANIA, APPELLEE



Appeal from the Order of the Commonwealth Court dated April 25, 2007 at No. 885 F.R. 2004 922 A.2d 87 (Pa. Cmwlth. 2007).

The opinion of the court was delivered by: Madame Justice Todd

CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, McCAFFERY, GREENSPAN, JJ.

ARGUED: December 2, 2008

OPINION

In this direct appeal from the Commonwealth Court, we consider whether "canned" computer software*fn1 constitutes "tangible personal property," such that the purchase of such software is subject to sales tax under the Tax Reform Code, 72 P.S. § 7201 et seq. (the "Code").*fn2 For the reasons that follow, we conclude that canned computer software is tangible personal property, and, therefore, that purchases thereof are taxable.

I. Factual and Procedural History

Appellant Dechert LLP ("Dechert") is a limited liability partnership which provides legal services. Between November 2, 2000, and December 31, 2003, Dechert paid $211,394.70 in state sales tax in connection with the purchase of canned computer software licenses. The parties stipulate to the following payments by Dechert:

a. A portion of the licenses purchased consisted of licenses to use software in which [Dechert] received tangible items such as the software program on a storage media, i.e., disk or CD and product manuals. The amount of tax paid by [Dechert] for such licenses was $28,837.21.

b. A portion of the licenses purchased consisted of license renewals for products previously purchased by [Dechert]. The license payments were for continued use of the same software programs, initially delivered on disk to [Dechert], or for a newer version of those programs. The amount of tax paid on those license renewals was $121,648.55.

c. A portion of the amount paid by [Dechert] was for computer software support and maintenance services such as telephone support. The amount of tax paid by [Dechert] for maintenance and support [was] $59,741.34. The amount paid . . . for maintenance and support does not involve any transfer of software or tangible personal property.*fn3

d. A portion of the amount paid was for licenses for software programs that were delivered electronically by the vendor. The amount of tax paid by [Dechert] on the electronically delivered software programs [was] $1,167.60.

Dechert LLP v. Commonwealth, 922 A.2d 87, 88-89 (Pa. Cmwlth. 2007) ("Dechert I"). In November 2003, Dechert filed an application with the Board of Appeals, seeking a refund of sales tax it had paid in connection with the transactions identified above. The Board of Appeals denied relief, and Dechert appealed to the Board of Finance and Revenue, which affirmed. Dechert filed a petition for review challenging this determination in the Commonwealth Court, arguing that a license to use canned computer software is not tangible personal property subject to sales tax.

On April 25, 2007, a three-judge panel of the Commonwealth Court affirmed, pending exceptions,*fn4 the order of the Board of Finance and Revenue in a published opinion. In doing so, the court noted that Section 7202(a) of the Code imposes a six percent tax on each sale at retail of tangible personal property or services; that a "sale at retail" is defined under Section 7201(k)(1) of the Code as "[a]ny transfer, for a consideration, of the ownership, custody or possession of tangible personal property, including the grant of a license to use or consume whether such transfer be absolute or conditional and by whatsoever means the same shall have been effected"; and that "tangible personal property" is defined, in part, under Section 7201(m) of the Code as "[c]orporeal personal property including, but not limited to, goods, wares, merchandise, . . . electricity for non-residential use, prepaid telecommunications, premium cable or premium video programming service . . . [and] . interstate telecommunications service originating or terminating in the Commonwealth." Dechert I, 922 A.2d at 90 (emphasis original). The court further noted that a 1997 statement of policy of the Department of Revenue, which is still in effect, provides that the sale at retail or use of canned software is subject to sales and use tax. Id. (citing 61 Pa. Code § 60.19). Finally, the Commonwealth Court noted that, in Graham Packaging Co., LP v. Commonwealth, 882 A.2d 1076 (Pa. Cmwlth. 2005), it had addressed the same issue raised by Dechert and determined that "the sale of all canned software, whether transmitted electronically or on a physical medium, is taxable as the sale of tangible personal property," and, therefore, that licenses to use canned software also were properly taxed. Dechert I, 922 A.2d at 91 (quoting Graham Packaging, 882 A.2d at 1087).

Thereafter, Dechert filed exceptions to the Commonwealth Court's opinion and order. In denying Dechert's exceptions, the Commonwealth Court, en banc, reiterated its prior conclusion that, under the plain language of Section 7201(k)(1), a license to use tangible personal property is subject to taxation. The court further opined: "Dechert continues to confuse the corporeal software program with the intangible right to use and copy the software. The object of the transaction is the computer program, not the license. Absent the program, the license is useless." Dechert LLP v. Commonwealth, 942 A.2d 210, 212 (Pa. Cmwlth. 2008) ("Dechert II"). The en banc court also rejected Dechert's argument that the court had erred in Graham Packaging by relying on a Louisiana case, South Central Bell Telephone Co. v. Barthelemy, 643 So.2d 1240 (La. 1994), in construing the definition of tangible personal property, explaining that it had relied on South Central Bell, not for the definition of tangible personal property, but simply for "elucidation on the nature of software." See Dechert II, 942 A.2d at 212. Dechert filed an appeal as of right with this Court.

II. Arguments

On appeal, Dechert argues that, because Section 7202(a) of the Code imposes sales tax on the sale at retail of tangible personal property, and the definition of tangible personal property does not expressly include software licenses of any type, the amount Dechert paid for licenses to use software is not taxable. In support of its argument, Dechert offers that software programs generally are copyrighted, and that the typical licensing agreement contemplates that the software developer retains ownership of each individual copy of the software program, including single copies delivered to the user. Appellant's Brief at 13. Thus, Dechert asserts a licensee like itself "acquires the right to use patented processes embodied in the software that it otherwise would be prohibited from using," and the tangible media by which the software is conveyed, e.g., a compact disk, is of no value in and of itself, and gives the purchaser no right to copy, install, or use the "copyrighted materials and patented ideas that comprise the software program." Id. at 14. Indeed, Dechert points out that tangible media often is unnecessary, since software programs can be downloaded electronically. Id. According to Dechert, "consideration paid for a license to use canned computer software is consideration paid for intangible intellectual property rights, that is, the right to use those instructions, not consideration paid for the transfer of tangible personal property." Id. at 15.

The Commonwealth, in contrast, contends the Code clearly specifies that licenses to use tangible personal property are taxable, and that Dechert essentially ignores this fact. The Commonwealth further submits that the Commonwealth Court properly determined that canned computer software is tangible personal property, and that any perceived inconsistency between tax treatment of custom software and canned software is justified.

III. Analysis

The issue presented in the instant case is whether canned computer software constitutes tangible personal property under the definition set forth in Section 7201(m) of the Code, and, therefore, is subject to sales tax under Section 7202(a), which imposes sales tax on transfers of tangible personal property. This is an issue of statutory construction, which is a pure question of law; accordingly, our standard of review is de novo, and our scope of review is plenary. Commonwealth v. Bortz, 589 Pa. 431, 434, 909 A.2d 1221, 1223 (2006). In accordance with the Statutory Construction Act, 1 Pa.C.S.A. §§ 1501 et seq., our goal in interpreting a statute is to ascertain and effectuate the intent of the legislature. See 1 Pa.C.S.A. § 1921(a). Generally, the best indication of the General Assembly's intent is the plain language of the statute. Martin v. Commonwealth, Dep't of Transp., Bureau of Driver Licensing, 588 Pa. 429, 438, 905 A.2d 438, 443 (2006). When the words of a statute are clear and free from all ambiguity, the letter of the statute is not to be disregarded under the pretext of pursuing its spirit. 1 Pa.C.S.A. § 1921(b). When, however, the words of a statute are not explicit, the intention of the General Assembly may be ascertained by considering a number of specific factors, as discussed more fully below. 1 Pa.C.S.A. § 1921(c).

With these principles in mind, to determine whether licenses to use canned computer software constitute tangible personal property under Section 7201(m) of the Code and, thus, are subject to sales tax, we first look to the relevant statute. As noted above, Section 7202(a) provides for the imposition "upon each separate sale at retail of tangible personal property or services, as defined herein, within this Commonwealth a tax of six per cent of the purchase price." 72 P.S. § 7202(a). "Sale at retail" is defined, inter alia, as "[a]ny transfer, for a consideration, of the ownership, custody or possession of tangible personal property, including the grant of any license to use or consume whether such transfer be absolute or conditional and by whatsoever means the same shall have been effected." 72 P.S. § 7201(k)(1) (emphasis added). Thus, the clear and unambiguous language of the statute provides that a license to use or consume tangible personal property is subject to sales tax. As it is undisputed Dechert purchased licenses to use canned software, the question, therefore, becomes whether canned computer software constitutes tangible personal property.

"Tangible personal property" is defined in the Code as:

Corporeal personal property including, but not limited to, goods, wares, merchandise, steam and natural and manufactured and bottled gas for non-residential use, electricity for non-residential use, prepaid telecommunications, premium cable or premium video programming service, spirituous or vinous liquor and malt or brewed beverages and soft drinks, interstate telecommunications service originating or terminating in the Commonwealth and charged ...


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