STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

NOVA COMPUTING SERVICES, INC., )

a Florida corporation, )

)

Petitioner, )

and )

)

Information Consultants to )

Management and ISIS Corporation, ) CASE NO. 76-1475RX

)

Intervenors, )

) REUBIN O'D ASKEW, Governor, )

et al., )

)

Respondents. )

)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly designated Hearing Officer, K. N. Ayers, held a public hearing in the above styled case on November 4, 1976 at Miami, Florida.

APPEARANCES

For Petitioner Robert M. Sherin, President and Intervenors: Nova Computing Services, Inc.

15805 Southwest 101st Avenue Miami, Florida 33157

For Respondent: Patricia S. Turner, Esquire

Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304

By petition filed August 12, 1976, Nova Computing Services, Inc. (Nova or Petitioner) seeks to invalidate Rule 12A-1.32(4) and (7) F.A.C. By Motion and Memorandum to Intervene, Information Consultants to Management, Inc. (ICM) and ISIS Corporation (ISIS) dated August 16, 1976 requested permission to intervene in these proceedings. By Petition for Formal Hearing under F.S. 120.57 dated September 10, 1976 Nova further requests that at the formal hearing conducted pursuant to the rule challenge under 120.56 F.S. that rulings be made on such other evidence as may be presented relevant to the subject matter apart and distinct from Petitioner's challenge to Rule 12A-1.32 F.A.C. By this latter petition Nova seeks to have the assessments for sales taxes levied against it set aside at this hearing. While the determination of the validity of the rule will be material and perhaps conclusive with respect to the assessments levied against Petitioner and Intervenors, this issue will require submission of a recommended order to the Department of Revenue and will be accomplished concurrently with the instant order.

As a preliminary matter before reaching the rule challenge, Petitioner's Motion for Expenses on Failure to Admit filed October 28, 1976, argued at the hearing, with parties submitting briefs subsequent to the hearing, will be resolved. Basically Petitioner contends that Respondent in its Response to No.

10 of Petitioner's First Request for Admissions denied same and Petitioner is entitled to his costs in proving this fact.

During a conference between Petitioner and Respondent the original assessment levied against Petitioner for sales and services by Petitioner to customers in which computer information was conveyed on magnetic tapes, the tax on these transactions was abated. Request for Admission No. 10 and the Answer thereto are as follows:

"Q. In arriving at the Petitioner's Revised Assessment, the Respondent abated the Petitioner's Original Assessment for all information on magnetic tape.

1. Deny."

Respondent contends that the response given was correct because the assessment was abated by reason of there being neither a transfer of title nor possession of the magnetic tape and not for (because?) the information [was] on magnetic tape. As a result of this failure to admit Petitioner seeks to recover costs of $769.33 representing 8 hours of Petitioner's time at $50.00 per hour, deposition of Mr. Pooley, witness fees for three witnesses, two being from Tallahassee, and fees for service of subpoenas on three witnesses.

The deposition and the testimony of these three witnesses comprised a great deal more than proving the Respondent in fact abated Petitioner's original assessment for the sale taxes represented by sales involving magnetic tapes.

While the Respondent's interpretation of the request for admission appears strained it cannot be said to be wholly unwarranted. This coupled with the fact that this one admission was a minuscule part of the evidence adduced requires denial of the Motion for Expenses for failure to admit.

During the course of the proceedings 5 witnesses were called by Petitioner and 6 exhibits were admitted into evidence. Pleadings, admissions, and responses to interrogatories have also been considered.

FINDINGS OF FACT

1. On December 11, 1974 Rule 12A-1.32 F.A.C. became effective following notice (Exhibit 6) that numerous sections of the Revenue Code were being revised and that a public hearing on the revisions was being held by the Governor and Cabinet.

   
   

2. At the time this rule became effective, rulemaking was governed by

   120.041 F.S. and the procedure required in that section (which was replaced by

   120.54 F.S. on January 1, 1975) was followed.

   
   

3. Section 120.011 F.S., also repealed on January 1, 1975, provided that no rule enacted pursuant to Chapter 120 could be retroactive unless expressly so stated.

   
   

4. Assessments against Petitioner resulting from the audit taken in 1975 covered the period January 1, 1973 to November 30, 1975.

5. Petitioner's and Intervenor's business is "data conversion contracts and projects" by way of keypunching, key verifying, typing, key tape, key disk, and direct computer entry, or a combination depending on relative efficiencies and machine availability, with or without computer printed reports. More specifically, Petitioner's business of data conversion is the conversion of data from the written or spoken word or symbol into a communication medium (card, tape, disk, paper tape, paper, and direct to computer) through personal services. In connection therewith from time to time Petitioner purchases custom computer systems and programs.

   
   

6. In essence, Petitioner converts data received from his customers into a form that can be placed in a computer and thereafter retrieved for such purposes as the customer may desire. In performing this function Petitioner uses paper tape, punch cards, magnetic tape, key tapes, keypunch, typewritten sheets, telephone lines, and other means of transmitting the information or data direct to the computer. The latter methods have been referred to as third generation computer software as the data is transmitted through a cathode ray tube by the operator direct to the computer rather than by means of cards, tape, or other tangible property on which the data is placed for transmission into the computer.

   
   

7. The computer program in its operating environment is a product of human intelligence reduced to binary pulses, which are interpreted by the computer machinery to cause human knowledge to be transposed into desired and meaningful output.

   
   

8. The basic issue to be resolved is the nature of computer software. Computer hardware refers to the tangible parts of the computer itself while software denotes the information loaded into the computer and the directions given to the computer as to what to do and upon what command.

   
   

9. In its assessment Respondent has demanded payment for sales tax involving software processed and sold by Petitioner and Intervenors transmitted on punched cards, paper tape, and typed sheets. Respondent abated the assessment involving magnetic tapes because the tape was owned by Respondent and returned to him when the data superimposed thereon had been stored in the computer. Respondent does not assess sales taxes for computer information supplied to the customer unless tangible property on which the data is superimposed is used and which tangible property is not reusable because of the changes to the tangible property produced when the information or data was placed thereon. Since the magnetic tape was returned to Petitioner in a reusable state and title was never transferred to the customer, Respondent abated the assessment for sales taxes resulting in sale of software via magnetic tape. Similarly Respondent does not claim sales taxes are due when data is fed direct to the computer as no tangible property is transferred. However, when the identical data is transmitted to the computer by means of punched cards, paper tape or other tangible property which is physically changed by the addition of the intelligible data, sales taxes are collected pursuant to Rule 12A-1.32(4) and (7) F.A.C.

   
   

10. The tangible property on which the data is superimposed has a value of less than five percent of the total sales price charged for the services.

    
    

11. The same type of service is performed by Petitioner whether the data is ultimately entered into the computer by punched cards, magnetic tape, or direct.

    CONCLUSIONS OF LAW

12. Rule 12A-1.32(4) and (7) F.A.C. here under attack provides: "(4) A software package which includes such

    items as instructional material,

    pre-punched cards or programmed tapes is construed to be tangible personal property and the entire charge therefor is taxable, including the services of a technician to assist the customer in the use of the package whether or not his services are separately itemized on the billing. The same ruling applies to customized program packages as to off-the-shelf program packages.

    (7) Key punch cards are construed to be tangible personal property and the entire selling price including any services that are a part of the sale is taxable. The charge made for keypunching cards furnished by the customer is a processing charge and is taxable."

    
    

13. The statute on which the validity of this Rule must be predicated has been enacted in Chapter 212 F.S. Chapter 212 F.S. provides for tax on sales, use and other transactions. Section 212.02 F.S. provides in pertinent part:

    
    

    "(2) 'Sale' means and includes:

    1. Any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever of tangible personal property for a consideration;

       (c) The producing, fabricating, processing, printing, or imprinting of tangible personal property for a consideration for customers who furnish either directly or indirectly the materials used in the production, fabricating, processing, printing or imprinting; . . ."

       "(4) 'Sale price' means the total amount paid for tangible personal property, including any services that are a part of the sale, valued in money, whether paid in money or otherwise, and includes any amount for which credit is given to the purchaser by the seller

       . . . ."

       "(12) 'Tangible personal property' means and includes personal property which may

       be seen, weighed, measured, or touched or in any manner perceptible to the senses "

       
       

14. Legislative intent with respect to sales tax is expressed in 212.05

    F.S. which provides in pertinent part:

    
    

    "It is hereby declared to be the legislative intent that every person is exercising a taxable privilege who engages in the business of selling tangible personal property at retail in this state . . . . For the exercise of said privilege a tax is levied on each taxable transaction or incident and shall be due and payable, according to the brackets set forth in section 212.12(10 as follows "

    
    

15. Specified exemptions to taxes imposed by this chapter are contained in

    212.08 F.S. which provides in pertinent part:

    
    

    "(7)(e) 1. Also exempted are professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made."

    
    

16. Respondent contends that the taxes imposed by Rule 12A-1.32 F.A.C. are authorized by the provisions of Chapter 212 F.S. and that the sales taxes here under consideration are due and payable without regard to the Rule. Accordingly the Respondent takes the position that the promulgation of the Rule in December, 1974 served only to clarify the law with respect to specific items of computer software and, therefore, was in no way retroactive.

    
    

17. Research has disclosed no Florida cases construing computer software as tangible or intangible property. Askew v. Bell, So.2d 501 (1st Dist. Ct. App. 1971) involved sales tax on the purchase of transcripts prepared by court reporters by any party to the proceedings. The court held the reporter was not engaged in a taxable sale of tangible personal property and approved the holding of the lower court that:

    
    

    "The reporter throughout the entire process is engaged in rendering a service and that the furnishing of any commodity is a mere incident to that service."

    
    

18. Without expressly so stating the court appears to have held that the sale was exempt pursuant to 212.08(7)(e) F.S. above quoted.

    
    

19. The case of Texas Instruments v. U.S., 407 F. Supp. 1326 (D.C. N.D. Tex. 1976) involved, inter alia, a claim for investment tax credit; and Section

48 of the Internal Revenue Code limits the applicability of the credit to "tangible personal property." The court held that Texas Instruments was not entitled to take the investment tax credit for information on magnetic tape

". . . because the 'real' investment by TI is not in the tangible computer tapes themselves but in the seismic information which it

collected: an intangible property . . . .

Once collected that information would not wear out. True, technological innovation might render the information useless, but unlike a bulldozer or a conveyer belt, the collected information would remain trapped in precisely scattered electrons forever."

(Id. pp 1338, 1341-2)

20 Respondent contends that because Petitioner changed the punch cards and paper tape it "processed" the tangible property and thereby brought it into the ambit of 212.02(2)(c) F.S. above quoted. Provisions of a Texas statute identical to Section 212.02(2)(c) F.S. were considered in Statistical Tabulating Corporation v. Bob Bullock, 538 S. W. 2d 259 (CCA Tex. 1976). There the only materials furnished by Statistical Tabulating were the cards punched to reflect the data supplied by the customer. The Comptroller, like the Department of Revenue here, took the position that a "sales tax" is due on the entire process, and denied that the punching of the cards, from the data supplied by the customer, is a "service rendered" within the terms of the Sales, Excise and Use tax (Articles 20.01, et seq., V.A.T.S., Taxation-General, Ch. 20, Vol. 20A). In ruling that the service performed by Statistical Tabulating was not subject to the Texas sales tax the court stated at page 20:

"The parties come to issue on the word 'processing' as used in the statute and the State insists that the process, coupled with the cards used and furnished by Statistical Tabulating, amounts to a sale, as opposed to the furnishing of a service, which is not taxable. The so-called materials 'used in' the processing are furnished directly by the customer in the form of data."

"Under the facts of this case the customer does not furnish materials in the nature of tangible things. The 'materials' furnished are data, information, statistics, which are intangible products of accounting, research, or record. The basic definition of material is 'pertaining to, or consisting of, matter; corporeal; physical; not spiritual '

(Webster: International Dictionary of the English Language, 2nd Ed., Unabridged). The word material stems directly from Latin materia: 'stuff, matter, materials of which anything is composed; so the wood of a tree, timber for building . . .' (Lewis & Short: A Latin Dictionary, Oxford University Press, 1975). We are aware of a secondary, evolved and derivative meaning which includes data

. . . such as notes, documents, sketches, etc., which may be worked up into a more finished form; as materials for a biography

. . .' (Webster, supra). There is no working up 'into a more finished form' under the facts of this case, only a mechanical transference of data, requiring no

alteration of interpretation, to machine cards suitable for use in computers."

* * *

"We conclude that the statute so plainly levels the tax upon things corporeal, 'tangible personal property' as to require the construction that the Legislature did not intend to tax the processing operation of Statistical Tabulating, and so we hold."

1. Commerce Union Bank v. George M. Tidwell, Commissioner of Revenue State of Tennessee, 538 SW 2d 405 (Tenn. 1976) also involved the taxation of computer software as "tangible personal property". Tennessee law defines tangible personal property as "personal property which may be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses." This definition is identical to 212.02(12) F.S. above quoted.

   
   

2. In holding that computer software was intangible property as distinguished from a movie film or phonograph record which the court had previously determined to be tangible personal property and subject to tax, the court at pages 407, 408 stated:

   
   

   "What is created and sold here is information, and the magnetic tapes which contain this information are only a method of transmitting these intellectual creations from the originator to the user. It is merely incidental that these intangibles are transmitted by way of a tangible reel of tape that is not even retained by the user."

   
   

   "In Crescent the tax was levied on the rental of a motion picture film. The film is inherently related to the movie; without the film there could be no movie. Therein lies the crucial difference. Magnetic tapes and cards are not a crucial element of software. The whole of computer software could be transmitted orally or electronically without any tangible manifestation of transmission.

   See, Heinzman, Computer Software-Should It Be Treated As Tangible Property For Ad Valorem Tax? The Journal of Taxation

   (September 1972)."

   
   

   "It does not appear that appellee has attempted to tax computer programs purchased by appellant which were transmitted to its computers from outside the state by way of telephone lines. That method of transmission, without question, constitutes the purchase of intangible personal property. The principle is the same, only the method of transmitting the information differs."

   * * *

   "When the information is transmitted from the tape to the computer the tape is no longer of any value to the user; and it is not retained in the possession of the user. The information on the tape, unlike the phonograph record, is not complete and ready to be used at the time of its purchase. It must be transmitted into a language understood by the computer. Once this information has been translated and introduced into the computer and the tapes returned or the punch cards destroyed, what actually remains in the computer is intangible knowledge; that is what is purchased, not the magnetic tapes

   or the punch cards. District of Columbia v. Universal Computer Associates, Inc. 151 U.S. App. D.C. 30, 465 F.2d 615 (1972). Transfer

   of tangible personal property under these circumstances is merely incidental to the purchase of intangible knowledge and information stored on the tapes. See Washington Times-Herald, Inc. v. District of Columbia 94 U.S. App. D.C. 154, 213 F.2d 23

   (1954). There the newspaper had purchased from an artist the right to reproduce his cartoons. These cartoons were transferred

   to the newspaper and were physically embodied in mats which were then used to reproduce the cartoons in the newspaper. The court held that what the newspaper had purchased was the right to reproduce the cartoons, and not the

   material upon which the cartoons were impressed."

   
   

3. The cases above quoted involved identical issues with those here considered. While these decisions are not binding in this proceeding the reasoning therein contained is logical and persuasive. The software or data involved is the same whether transmitted by punch cards or direct to the computer. What is sold by Petitioner is a service and the use of the tangible punch cards is incidental and inconsequential to the transmission of the data which is intangible property.

   
   

4. Services as here performed are exempted from sales tax by Section 202.08(7)(e) F.S. above quoted. Even if not so exempted the fundamental rule of construction that tax laws are to be construed strongly in favor of the taxpayer against the government, and that all ambiguities or doubts are to be resolved in favor of the taxpayer, requires a holding that Chapter 202 F.S. does not authorize a tax on the intangible property here involved. Leadership Housing, Inc. v. Department of Revenue, 336 So.2d 1239 (Fla. App. 1976), Maas Brothers, Inc. v. Dickinson, 195 So.2d 193 (Fla. 1967).

   
   

5. From the foregoing it is concluded that Nova Computing Services, Inc., Information Consultants to Management, Inc. and ISIS Corporation are selling services to their customers which are exempt from sales tax pursuant to 212.08(7)(e) F.S. It is further concluded that so much of the tangible property involved in the processing of the data supplied by the customer into a form that can be fed into the computer is an inconsequential element for which no separate

   charges are made. The consequential element sold in these cases is intangible property which is not subject to the sales tax on tangible personal property by Chapter 212 F.S.

   
   

6. Accordingly the provisions of Rule 12A-1.32(4) and (7) F.A.C. are in conflict with the provisions of Chapter 212 F.S. and are void. It is therefore,

ORDERED and ADJUDGED that the promulgation of Rule 12A-1.32(4) and (7)

F.A.C. was an invalid exercise of delegated legislative authority.

DONE and ENTERED this 20th day of December, 1976, in Tallahassee, Florida.

COPIES FURNISHED:

Robert M. Sherin, President Nova Computing Services, Inc. 15805 Southwest 101st Avenue Miami, Florida 33157

Patricia S. Turner, Esquire Assistant Attorney General Department of Legal Affairs The Capitol

Tallahassee, Florida 32304

Honorable Reubin O'D. Askew Governor, State of Florida The Capitol

Tallahassee, Florida 32304

Honorable Robert L. Shevin Attorney General

The Capitol

Tallahassee, Florida 32304

Honorable Doyle Conner Commissioner of Agriculture The Capitol

Tallahassee, Florida 32304

K. N. AYERS Hearing Officer

Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 20th day of December, 1976.

Honorable Ralph Turlington Commissioner of Education The Capitol

Tallahassee, Florida 32304

Honorable Bruce Smathers Secretary of State

The Capitol

Tallahassee, Florida 32304

Honorable William Gunter State Treasurer and

Insurance Commissioner The Capitol

Tallahassee, Florida 32304

Honorable Gerald Lewis Comptroller

The Capitol

Tallahassee, Florida 32304

Mr. J. Ed Straughn Executive Director Department of Revenue

Room 102, Carlton Building Tallahassee, Florida 32304

Mr. Carroll Webb, Executive Director Administrative Procedures

Committee

Room 120, Holland Building Tallahassee, Florida 32304

Mr. Robert H. Taylor, President ISIS Corporation

2780 Douglas Road, Suite 205

Miami, Florida 33133

Docket for Case No: 76-001475

Orders for Case No: 76-001475