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Taxation of Software as Tangible Personal Property in Kentucky Deemed Correct


Software/Hi-Tech

A Kentucky company that acquired licenses to use prewritten computer software along with the hardware needed to run the software sought a refund of the sales and use tax paid on the software, arguing that it was not tangible personal property. When the purchase was made in 2002, “tangible personal property” was defined as “personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses and includes natural, artificial and mixed gases, electricity, water, and prepaid calling arrangements.” At that time, if software was delivered on a physical medium, it was considered tangible personal property subject to Kentucky sales and use tax. In 2004, Kentucky tax law was amended to include prewritten computer software as tangible personal property. The licensor of the software argued that the software itself is separate from the medium it was delivered on and is intangible, thus exempt from sales and use tax. The Court of Appeals stated that it was plausible that the Legislature intended to include software within tangible, taxable items since one cannot imagine something more intangible than gas, electricity or prepaid calling arrangements. The licensor’s argument that prewritten software was not included in the definition of tangible personal property until the 2004 tax law amendment was also refuted. The Court stated that this was no indication that prewritten software was exempt intangible property prior to the amendment. Instead, the amendment was made to remove the distinction made in regards to the software’s method of delivery (on a tangible medium vs. electronically) and to tax all prewritten computer software. (Computer Services, Inc. v. Finance and Administration Cabinet, Department of Revenue, Kentucky Court of Appeals, No. 09-CI-00118, January 7, 2011)

(08/19/2011)
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