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How Is Video Not “Tangible Personal Property”?

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[Research Note: Dictionaries – exactly forty were consulted (love that Internet!) – are evenly split in their treatment of the word “tangible”: about half emphasize a susceptibility to the sense of touch (without excluding the other four senses) as being the defining characteristic, equating tangibility with “palpability.” The remainder assert that “tangible” means “apprehensible by any of the five senses” and consider it a fairly precise synonym for “perceptible.” Here are some representative definitions, reproduced verbatim:

  • Tangibility ∙ In law, the ability to be apprehended by the human senses
  • Capable of being perceived especially by the sense of touch
  • Capable of being perceived by the senses or the mind; especially capable of being handled or touched or felt
  • Tangibility is the attribute of being easily detectable with the senses
  • TANGIBLE normally refers to assets that can be held or seen

The (truly terrible) case below plays very fast-and-loose with the rules of language – and, consequently, with the rule of law.]

Last summer, we observed the “extremely curious” verdict handed down by Louisiana’s Jefferson Parish District Court in the telecom tax case Newell Normand, Sheriff and Ex-Officio Tax Collector of Jefferson Parish, Louisiana v. Cox Communications Louisiana, L.L.C. (“Cox”) (Jefferson Parish 24th Judicial District Court, Case No. 706-766 (Hon. Robert A. Pitre, Jr., J.), Decided, June 11, 2014), an outcome so clearly contrary to law (and to reason) that we predicted it would be appealed to a higher court.

Sure enough, Cox was appealed. However – and just as incredibly – the tax collector lost AGAIN on appeal. (Newell Normand, Sheriff and Ex-Officio Tax Collector for the Parish of Jefferson v. Cox Communications Louisiana, LLC, Case No. 14-CA-563, Court of Appeal of Louisiana, Fifth Circuit, 14-563 (La. App. 5 Cir. 12/23/14); 2014 La. App. LEXIS 3037; Decided, December 23, 2014; Judgment Deemed Final, January 6, 2015) Reporting on the appeal this past winter, we observed that “the court managed to get every key aspect of this case completely and decisively wrong.”

Still puzzled and irked by such injustice, we now poke at the question a third time, writing to the Louisiana Department of Revenue to request an explanation, specifically regarding Revenue Ruling No. 10-001 and Revenue Information Bulletins Nos. 10-015 and 10-028, which bear directly on the matter. We look forward to a reply (and to sharing with you, dear reader, whatever may be learned).

From the top: The initial action examined the taxability of “Video-On-Demand” (“VOD”) and “Pay-Per-View” (“PPV”) television services sold by cable and satellite providers. The Jefferson Parish tax authority applied the sales levy to receipts Cox Communications Louisiana, L.L.C. (“Cox”) earned from providing these services during the years 2005 to 2009, calculating an assessment of $700K, which Cox immediately challenged. The District Court opinion concluded “that VODand PPV programming are not tangible personal property, but are nontaxable services,” letting Cox completely off the hook.

A complicating factor here is that Louisiana, unique among the fifty States, does not follow the (British-derived) Common Law, but, instead, adheres to the Code Civil (based on the French Code Napoleon) due to a happenstance of American colonial history. One result is that many legal terms applicable in the rest of the country – such as “tangible personal property,” or the principle that selling and renting an item get taxed similarly – have no currency here, or at least have somewhat less. However, the District Court’s ruling was defective even per its own terms under Louisiana law.

A second difficulty, derived from the first, is that the absence of a conforming state-level definition of TPP led courts to adopt the questionable reasoning of the Supreme Court when it imposed a false equivalence (think, squishing a square peg into a round hole) between TPP and a vaguely parallel term in the Code Civil: “The definition of tangible personal property for use and sales tax purposes is synonymous with corporeal movable property” (South Central Bell Telephone Co. v. Barthelemy, 643 So.2d 1240 (1994)). Unfortunately for those of us committed to words’ actual meanings, “corporeal” and “moveable” are much narrower terms than is “tangible.” However, utterances of the high court carry obvious legal weight and cast substantial shadows (leaving the sense of this matter twisting in a penumbral twilight).

Most singularly, that comment by the Louisiana Supreme Court worked its way into the Louisiana Administrative Code [of Regulations], § 4301 ∙ Uniform State and Local Sales Tax Definitions, resulting in an entry that quite contradicts itself within the span of a single definition:

“Tangible Personal Property –

a. R.S. 47:301(16)(a) [the definitions Statute] defines tangible personal property as personal property that can be seen, weighed, measured, felt, touched, or is perceptible to the senses. The Louisiana Supreme Court has ruled that tangible personal property is equivalent to corporeal movable property as defined in Article 471 of the Louisiana Civil Code. … Examples of tangible personal property include but are not limited to …

  1. digital or electronic products such as ‘canned’ computer software, electronic files, and ‘on demand’ audio and video downloads.”

In other words, after (perhaps improperly, perhaps meaninglessly) insisting that TPP is “equivalent to corporeal movable property,” the Regulation declares that digital products exactly like the ones in Cox – which are indubitably non-corporeal – ARE nevertheless TPP! It’s the correct conclusion – but it’s totally inconsistent with this line of reasoning.

Ultimately – Regulation and Statute be damned! – the District Court threw credibility to the wind and ruled that on-demand video IS NOT TPP! Thus, the trial court had reached a clearly erroneous verdict in reversing the judgment of the revenue department, which had determined video to be both tangible and taxable. The ruling was then brought before the next level of tribunal by Jefferson Parish where, on appeal . . . the fallacious verdict WAS AFFIRMED!

At trial in the Circuit Court of Appeal, appellee Cox interrogated two of its own Vice Presidents as expert witnesses. One stated that “VOD and PPV programming are data streams … no one in this industry for the past 26 years has ever considered VOD and PPV programming to be a form of software” – that is, taxable TPP. Another Cox “expert” “testified that in the 800 jurisdictions where Cox conducts business, including Louisiana, Cox does not pay sales tax on VOD and PPV programming as tangible personal property.”

Absolutely none of this uncorroborated, self-serving opinion testimony was relevant, yet the court repeatedly referred to it as “evidence and facts” (no spin-doctoring there!) and concluded, “Accordingly, the trial court was not manifestly erroneous in finding that VOD and PPV programming are not tangible personal property.” So much for the rule of reason and the appellate judiciary’s adhering to clear Louisiana law.

Floating in the near background of these legal proceedings were two significant earlier DOR publications with material relevance to the issues vexing the court: Sales and Use Tax Revenue Ruling No. 10-001 of March 23, 2010 (“Taxability of Transactions for Remotely Accessed Software, Digital or Media Products, and Other Items of Tangible Personal Property, and the Sale, Use, or Lease of Software and Program Content”) and Sales Taxes Revenue Information Bulletin No. 10-015 dated June 25, 2010 (“Sales Tax Treatment of Transactions Involving Pay-per-view and On-demand Movies Leased by Viewers from Cable Television and Satellite Television Providers”). Both policy documents couldn’t be more directly on-point, and both concur that PPV and VOD are TAXABLE:

Rev. Rul. 10-001 concerns sales that “transfer computer readable materials, media, or stored materials or data to a computer or other such equipment located within Louisiana. … The transactions vary from purchase of media, such as movies or music compilations, to accessing programs, data, or other property. Such property can be either stored on the user’s computer equipment or immediately consumed as seen, weighed, measured, felt or touched.” This Revenue Ruling confirms that the state’s Supreme Court had “dispelled the notion that there was a difference between the acquisition of books, films, video and audio tapes, etc., purchased as tangible things, and such works when delivered electronically,” and it further declares that “[t]he action of the computer … transforms the coded instructions into tangible personal property, capable of being experienced by the senses.” “If the electronically delivered property is deemed tangible upon conversion from electrical impulse, then even if it is only viewed in Louisiana on a computer screen, it has taken tangible form, has been ‘felt’ by the senses of sight or sound or both, and has been used or consumed and is subject to tax.” Quite clear.

Remarkably, RIB 10-015 is even more apropos, intended specifically “to provide guidance concerning the sales tax treatment of transactions involving pay-per-view movies and programs and on-demand television purchased for viewing by customers of cable television and satellite television providers. … The movie or program selected from pay-per-view or on-demand and viewed on the television set is perceptible to the senses. … ‘On-demand’ audio and video downloads generally are considered to be items of tangible personal property that are subject to Louisiana sales and use tax.” Sounds like this should be the end of the debate, does it not?

However, on November 15, 2010 – apparently out of nowhere – a new publication, Revenue Information Bulletin No. 10-028, declared that the DOR was “temporarily suspending the implementation” of these two policy statements (and no others!). The “temporary suspension” has stood for over 4½ years now, and no explanation for it has been forthcoming. (The Cox cases themselves make no reference to either the Ruling or the Bulletin.) Both courts reached their patently erroneous determinations by disregarding (even eschewing) plainspoken Louisiana law, valid ratiocination, and the workings of common sense, as well as the requirements of the language and of the physical universe.

Essential Note: Even without applying the sensible taxability principles articulated in the suspended DOR policy statements, the courts here could full well have come to a sound verdict based on the facts of the case and established law, since Louisiana Statutes and Regulations are perfectly clear concerning a video’s tangibility (see above). But they didn’t.

If Louisiana – or any state, for that matter – wants to exclude VOD and PPV from operation of its sales tax, it is wholly within its rights to do so; no one would dispute this. What it is NOT permitted to do, however, is to commit violence to the rational workings of the world. Louisiana courts are NOT free to ignore the definitions contained in Louisiana law, as they did here – or they should not be, at any rate. They are NOT allowed to disregard the rules of evidence, the rules of logic, the rules of physics, and the rules of English. Any jurisdiction is entitled to decide whether or not it wants to tax video, but what it CANNOT do is rule whether or not video is tangible and perceptible to the senses: a video’s tangibility/visibility/perceptibility is a fact of its existence, an inseparable component and innate property of its being. No amount of dancing around the question to arrive at a predetermined desired outcome can change that.

About the Author: Marc Palmer Kram is a Senior Tax Analyst at Wolters Kluwer Tax & Accounting US, where he performs quality control and troubleshooting on the vast taxability database supporting its best-in-class CCH tax-compliance software, and then sometimes writes about what he finds. Learn more about him by visiting his author bio page. Learn more about Wolters Kluwer at WoltersKluwer.com and SalesTax.com.

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