Bradley Partner Bruce Ely Quoted in State Tax Notes on Canned vs. Customized Software Debate

Bradley attorney Bruce Ely was quoted in State Tax Notes on a recent ruling from the Alabama Court of Civil Appeals that decided canned software that is later customized to satisfy the end user's needs is considered taxable personal property because it has not been “integrated in a unique way to the specifications” of the user at the time of purchase.

“This is the classic case of canned versus customized software and how each should be taxed under each state’s sales tax rules,” explained Ely regarding the case of Russell County Community Hospital LLC v. Department of Revenue. 

The appeals court found that at the time of purchase, the disputed software constituted canned software, which is taxable as tangible personal property in Alabama. Customized software, on the other hand, is tax-exempt because it involves the purchase of a service rather than a product.

The hospital argued that the software it acquired was exempt as customized software because it required coding by the seller, Medhost of Tennessee Inc. The hospital filed for a sales tax refund of approximately $17,000, which the Department of Revenue denied. While the tax tribunal initially ruled in favor of the hospital, concluding that the software constituted nontaxable custom software, its ruling was reversed by a trial court in January.

Ely, who represented Medhost, which was dismissed as a party before the case began, said the case attracted national attention because of Chief Judge Bill Thompson's dicta in his tax tribunal ruling that all software should be subject to sales tax. 

“The Department of Revenue took that suggestion to heart and raised that issue on appeal to the circuit court,” Ely said. “Thankfully, the [department's] able counsel withdrew that argument at the end of the trial, at my request on behalf of the software vendor." Although the issue wasn't addressed by the trial court or the appeals court, Ely said he predicts it will arise again in the future.

The complete article, “Alabama Court Delves Into Canned vs. Customized Software Debate,” appeared in State Tax Notes on November 21, 2018. (login required)