The Pennsylvania Department of Revenue has long taken the position that sales and use tax should be imposed on canned software products delivered to taxable Pennsylvania purchasers by disks or other tangible media. In contrast, the Department of Revenue has treated canned software purchased by electronic download as exempt from tax.

Recently, however, a panel of the Commonwealth Court of Pennsylvania held that sales and use tax applies to all retail sales of canned software, whether transmitted electronically or by disks or other tangible media. Graham Packaging Company, LP v. Commonwealth of Pennsylvania, No. 652 F.R. 2002 (September 15, 2005). In reaching its decision, the court surprisingly determined that canned computer software falls within the statutory definition of "corporeal" or tangible personal property. The court reasoned that canned computer software, once installed, is stored on a computer hard drive, can be physically perceived by checking the computer's files, and remains in the computer to operate the program each time it is used by the consumer. Purchases of custom designed software remain exempt from tax under the Graham decision, regardless whether the software is delivered on disks or other magnetic media or by electronic download.

While we expect the taxpayer to appeal the decision, it is unclear whether the decision will be reversed. We understand that the Department of Revenue may decide to apply the Graham decision prospectively to purchases of canned software delivered by electronic download occurring after September 15, 2005. In the meantime, we recommend that:

  • Beginning September 15, 2005 (the date of the Graham decision) taxable Pennsylvania purchasers of canned software, or renewal licenses for canned software, from out-of-state sellers pay use tax on such purchases even if the software is transmitted by electronic download; and
  • Pennsylvania sellers of canned computer software collect sales tax on all retail sales of canned software to taxable Pennsylvania purchasers.

We also recommend that taxable Pennsylvania purchasers retain the necessary information and consider filing claims for refund to protect their refund rights in the event that the Graham decision is reversed on appeal.

Copyright © 2005 by Ballard Spahr Andrews & Ingersoll, LLP.

This newsletter is a periodic publication of Ballard Spahr Andrews & Ingersoll, LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.

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