BigLaw Firm's Tax Bill for Software Hard to Swallow

PHILADELPHIA - In denying Dechert exemption from more than $200,000 in taxes paid for computer software, the state Supreme Court determined "canned" computer software is tangible personal property that is subject to sales tax.

Writing for the majority in Dechert v. Commonwealth of Pennsylvania , Justice Debra Todd said it was the first time the Supreme Court ruled on the issue, with the Commonwealth Court below relying on that court's precedent in the 2005 case Graham Packaging v. Commonwealth .

The Graham Packaging court adopted an "essence of the transaction test" that Todd said the majority in Dechert did not feel was necessary to resolve the case. The test entailed weighing whether the item at issue, or the essence of the transaction, was for intangible property or service or whether it was mainly the transfer of tangible property.

The Graham Packaging court said the General Assembly did not intend to limit taxes to "'only those items of physical matter that one can see with the naked eye and hold in one's hand,'" Todd said in citing the case.

The issue in Dechert , Todd said, was whether Section 7201(m) of the Tax Reform Code would define canned computer software as tangible personal property, thus making it subject to sales tax under Section 7202(a) of the code. She said the statute is clear that a license to use or consume tangible personal property is subject to sales tax.

Canned computer software, however, is not included in the list of examples in Section 7201 of what constitutes tangible personal property. Dechert argued the General Assembly's failure to include it suggests it didn't intend for the software to be taxed, according to the opinion.

The majority rejected that argument, citing other case law that ruled the inclusion of some items does not necessarily imply the exclusion of other categories. Todd said later in the op ...