The Sales Tax Problem

As I mentioned in this blog's inaugural post, there are problems with the line in EULAs that states "this software is licensed, not sold." The first such problem that we'll explore is that of sales tax. Let's examine a concrete example.

I live in the state of Massachusetts. This state has instituted a law that requires all retail sales of tangible property or services to be taxed at a rate of 5%. Not surprisingly, any time I buy retail boxed software from CompUSA (or any other software retailer in the state) I pay that 5% sales tax.

Why am I paying that sales tax? First, we need to decide if I'm buying tangible property or if I'm buying a service. It doesn't seem to fit the law's definition of a service: "a commodity consisting of activities engaged in by a person for another person for a consideration." I'm not paying anybody to engage in an activity for me. I'm paying to take possession of a box with some stuff inside it. Sounds more like tangible property to me.

So what this all means is that, because I'm paying the 5% sales tax, both the State of Massachusetts and CompUSA must believe that I am buying tangible property. That tangible property can only be the box and whatever is inside it. When I look inside retail boxes of software that I've bought, I usually find these two things:

1. A copy of the software (usually on CD or DVD).
2. One or more manuals and various other literature.

I have never purchased a retail box of software and found a tangible "license" inside of it (this would actually be impossible, I'll touch on that later). So apparently, I'm buying all of these physical things including a copy of the software. The State of Massachusetts and CompUSA both seem to be in agreement on this point, hence the 5% sales tax. This is in clear conflict with what EULAs usually say, that the software is "not sold".

If the EULA is correct then I'm not actually buying a copy of the software. In fact, according to the EULA, the only thing I "own" is the license. All the rest of the stuff in the box is property owned by the software publisher, and they are just allowing me to use it. Since I'm not buying any of it, I shouldn't be paying sales tax on it.

Software publishers can't simply throw a piece of paper in the box with the word "License" scrawled across it to work around this problem. Why? Because that's not what a license is. By definition, a license is intangible. It is an agreement, or more accurately, it is permission to do something. A piece of paper that says "This is a license to do X" is merely evidence of the license, not the actual license itself. This is why it would be impossible for a publisher to include a license "in the box".

Does this observation, that sales tax is applied to retail boxed software, absolutely prove that retail boxed software is usually sold, not licensed? Probably not. But it's just one of many other pieces of evidence indicating that, despite what EULAs say, software is in fact usually sold outright.