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Russell County Community Hospital, LLC v. State Department of Revenue

Alabama Court of Civil Appeals

November 16, 2018

Russell County Community Hospital, LLC, d/b/a Jack Hughston Memorial Hospital
v.
State Department of Revenue

          Appeal from Russell Circuit Court (CV-16-900160)

          MOORE, JUDGE.

         Russell County Community Hospital, LLC, d/b/a Jack Hughston Memorial Hospital ("the taxpayer") appeals from a judgment entered by the Russell Circuit Court ("the trial court") in favor of the State Department of Revenue ("the department") on the department's appeal from a final order of the Alabama Tax Tribunal ("the tax tribunal").

         Procedural History

         Between February 2012 and October 2014, the taxpayer purchased software products from Medhost of Tennessee, Inc. ("Medhost"); during that period, the amounts remitted by the taxpayer to Medhost for the purchase of software products included Alabama sales tax. On March 11, 2015, a joint petition was filed on behalf of the taxpayer and Medhost for a refund of sales tax that had been collected and remitted by Medhost on the purchase of the software products in the amount of $17, 907.39. On September 2, 2015, the department submitted correspondence to the taxpayer indicating that the software products sold by Medhost to the taxpayer appeared to be taxable tangible personal property; that the software products contained "canned software" that might or might not be customized; that the software products contained "canned programs" that are taxable; that the purchase invoices for the software products did not separate the canned software from the customized software; and that the full amount of the purchase price for the software products was subject to taxation. In a letter dated November 9, 2015, the department informed the taxpayer of its decision denying the refund request and notifying the taxpayer that, if the taxpayer disagreed with the department's decision, it could request a formal hearing before the tax tribunal.

         On November 24 2015, the taxpayer filed a notice of appeal and a request for a formal hearing before the tax tribunal with regard to the denial of the refund request regarding the $17, 907.39 in sales tax that had been collected by Medhost and remitted to the department. The department filed an answer to the taxpayer's notice of appeal. Following a hearing, the tax tribunal entered a final order on June 13, 2016, concluding that the software products at issue constitute nontaxable custom software and directing the department to issue the taxpayer the requested refund amount, plus applicable interest.

         On July 8, 2016, the department filed in the trial court a notice of appeal and a complaint, [1] seeking relief from the tax tribunal's order. A hearing was conducted on January 23, 2018, and, on January 26, 2018, the trial court entered a judgment overturning the tax tribunal's order and affirming the department's denial of the taxpayer's refund request. The taxpayer filed a notice of appeal to this court on February 28, 2018.

         Facts

         Sylvester Williamson, a revenue examiner for the department, testified that, in 2015, the department received a joint petition from the taxpayer and Medhost requesting a refund of approximately $17, 000, the amount of sales tax that they asserted had been collected and remitted by Medhost on the purchase price paid by the taxpayer for the purchase of software products. Williamson testified that an audit was scheduled, that he began requesting documents to support the refund petition, and that he had reviewed the documents provided to him. He stated that the invoices provided showed what product or products had been purchased and the amount of the sales tax charged on the purchase price for those products. According to Williamson, he determined that Medhost offers several software products that it sells to hospitals across the country and that the products purchased by the taxpayer had been standard software products rather than custom software products. Williamson testified that he had informed the taxpayer's representative of his findings and that the representative had responded that, according to Medhost, "coding" had been involved in the purchase of the software products. Williamson stated that all software products contain coding, but, he said, a "canned software" product is sold only after the coding for the product is complete, whereas a custom software product is built and programmed specifically for an individual customer. He stated that a canned software product is tangible personal property and that a custom software product is not because, he said, it involves the purchase of a service rather than a product.

         Williamson testified that, considering the taxpayer's representative's response to his findings, it appeared to him that the software products purchased by the taxpayer might have included some customization, but, he said, the software products that were purchased by the taxpayer were standard, or canned, products that are sold to multiple customers and the customization of the products had taken place after they were purchased by taxpayer. He stated that, based on the department's regulations, if a canned software product is customized after the product is purchased, the customization is nontaxable and the canned portion is taxable. Williamson stated, however, that, because the invoices submitted by the taxpayer included a single purchase price for the canned software and the customization of the canned software, the entire purchase price was taxable. According to Williamson, he had prepared a report in response to the refund petition, concluding that tangible personal property had been sold and that the entire purchase price indicated on each invoice was taxable. He testified that the refund petition was not due to be allowed because he had found nothing that would qualify for a tax exemption. Williamson stated that it was his understanding that Medhost's software products can be taken from one hospital to another and work properly at both facilities.

         Bill Anderson, the chairman and chief executive officer of Medhost, testified that Medhost is an "enterprise health care IT company." He testified that Medhost implements its software products, that each implementation is unique to the customer, but that the implementation does not involve programming. He testified that Medhost has a basic software product, or a number of different software products, and that, although Medhost's software products will work if taken from one hospital to another, the software will be inefficient if it was not customized to the individual customer. As a result, according to Anderson, Medhost makes its software products "highly configurable" to accommodate, as closely as possible, how each hospital conducts its business.

         According to Anderson, the implementation of Medhost's software products is separate from the sale of those products and involves the set up of hardware products, including third-party hardware products, and the software products purchased; requires discovery, during which Medhost representatives meet with representatives of the purchasing hospital to learn how that hospital operates; requires the configuring of the purchased software to meet the specific needs of the hospital, which, he stated, does not involve programming; and includes educating the hospital's employees on how the software works. (R. 66). He stated that, jointly with the purchasing hospital, Medhost performs an inventory of the hospital's hardware and software products and that, typically, it makes adjustments to the software product purchased by the hospital so that it interfaces with the hospital's existing hardware and/or other software products. Anderson testified that implementation of a software product is performed after the purchase of the product by the hospital, and is a service that includes diagnoses of problems, figuring out work flows, and attempting to configure the products to work.

         Anderson testified further that, in response to the taxpayer's appeal, he had taken each invoice included in the refund petition, had examined those invoices and the purchase orders related to the items on those invoices, and had categorized them. He stated that "interfacing," as seen on the invoices provided to the department, is a product that Medhost sells for the purpose of configuring third-party products to work with the purchasing hospital's database and that, when Medhost performs interfacing on a third-party's product, the basic software product is not changed. He testified that interfacing is performed as part of the implementation of the software product after the product is sold to a hospital. According to Anderson, certain of the interfaces are relatively common and are taken off the shelf from Medhost's normal product catalog. He stated that the interfaces are generally available to all of Medhost's customers and that, from a technical standpoint, nothing included in the taxpayer's petition for a refund amounted to customized programming or customized software. He testified further that there were no programmers involved in the implementation of the software products purchased by the taxpayer and that none of the items included in the refund petition involved the implementation of the software products that were purchased.

         Anderson stated that Medhost installs all of its products. He also testified that a Medhost customer would have access to the records necessary to install the software products it purchases from Medhost, but, he said, the customer would not have the level of authority in the system to configure the product itself. He stated that it is technically correct that basic software products purchased from Medhost will work from hospital to hospital, but, he said, Medhost performs a custom implementation of the software to configure the product for a purchasing hospital. He agreed that the software products offered by Medhost are highly ...


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