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Because tax statutes often tax each of these differently, this often results in confusion under the tax regimes. To the extent that one can generalize, most states tax sales of "canned software" while "custom" software is often characterized as a nontaxable service transaction. Kutten, Software Taxation and the OEM Agreement, The Georgia Department of Revenue currently takes the position that sales of "canned" or of "prewritten" software are taxable. Moreover, information contained in "software" can be transmitted through several media. As such, it could not be the subject of an investment tax credit.

Computer software does not include the mere compilation and storage of data, although such transactions may be separately taxable under a tax which is imposed on personal services in some states, see e.g., Bullock v. Transfers of "customized" software are often unclear. The Department also takes the position that modifications of prewritten software are taxable. For example, the information can be delivered on a computer through disc, digital transmission over telephone lines, through direct input by an individual, through a magnetic tape transfer or, in some old fashioned cases, punched cards. The courts which considered the issue for federal income tax purposes generally agreed with the Service, finding that the purchaser's main objective was to acquire knowledge or a process rather than tangible media, such as the software diskettes which sometimes carried the information.

As we move into the new millennium with an information based service economy the norm, the vast majority of our nation's economic activity is now subsumed in the so called "service" sector. Univeral Computer Associates, Inc., 465 F.2d 615 (U. South Carolina Tax Commission, supra, it appears that the latter transaction may avoid sales tax.

The old methods of taxation have become creaky and, in some cases, unworkable when applied to this economy.

(Software is not merely knowledge, but rather is knowledge recorded in a physical form which has physical existence, takes up space on the tape, disc, or hard drive, makes physical things happen, and can be perceived by the senses). The disks possess physical form, are capable of being touched, seen, and possessed, and are real and substantial. In the context of software, the Georgia Revenue Department has acknowledged that the writing of custom software for a specific customer is a service transaction not subject to sales tax.

In states where both tangible and intangible personal property are taxable, the classification nonetheless remain important because in many states intangible property is taxed at a lower or different rate base than tangible personal property. In Georgia, these ambiguities were resolved by the enactment of O.

If the software is utilized in the state where only tangible personal property is taxable but intangibles are not taxable, the question arises as to whether software will be categorized as a taxable tangible personal property or a nontaxable intangible personal property. What is "custom" as opposed to "canned" is less than clear. Finally, § 48-1-8(c) states that this limited definition of software as intangible property does not apply to "copies of computer software that are held as inventory in a tangible medium ready for sale at retail by one who is a dealer with respect to such property." So, such "shrink wrap" and inventoried software continues to be subject, presumably, to the personal property ad valorem tax regime.

The applicable statutes have often remained substantially unchanged for many years. However, if the software (which is the information used by the computer) were transferred via telephone lines, it is not clear how such a transaction could be subject to sales tax in Georgia.

Therefore it is not surprising that the revenue codes of many states generally reflect an economy in which the principal form of business is the manufacture and sale of tangible personal property. 1160, 91 ALR 3d 274 (Ala., 1977); District of Columbia v. In light of the court's dicta in Citizens & Southern v.

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