Is knowledge taxable?

Yes, says Maryland's highest court, at least when it is bought or sold in the form of "instructions" on a magnetic tape for a computer.

The Maryland Court of Appeals ruled today that prepackaged computer programs amount to tangible personal property--not simply intangible results of intellectual work--and thus are subject to the state's sales tax.

Officials in the Maryland state Comptroller's office hailed the ruling as a major legal victory but said it is not likely to boost sales tax revenues greatly since most computer program retailers in the state already collect the tax. Some 36 of 50 states impose a sales tax on such software sales, according to today's ruling.

The loser in the case was the Equitable Bank, Maryland's third largest financial institution and, like most others, heavily reliant on computers for bookkeeping functions.

A bank spokeswoman said, "We were really in this as a test case. The dollars were immaterial."

The bank had bought three "canned" or prepackaged computer programs eight years ago from two programming firms for $35,165, but paid no sales tax on them. When the comptroller's office attempted to assess the then-current 4 percent sales tax, the bank went to court, arguing that the programs were intangible software consisting of "knowledge" and "information" transferred from seller to buyer by the "temporary medium of magnetic tape."

No, said the unanimous seven-member court of appeals today. "Theoretically, a program could exist in the mind of the programmer," it said, "but as a practical matter, programs as obviously complex as those involved here must be recorded somewhere in some physical representation."

The court's 32-page opinion, studded with computer jargon and arcane technical references, likened a canned computer program to a phonograph record.

"A tape containing a copy of a canned program does not lose its tangible character because its content is a reproduction of the product of intellectual effort," wrote Judge Lawrence F. Rodowsky for the court, "just as the phono-record does not become intangible because it is a reproduction of the product of artistic effort."

The court rejected Equitable Bank's argument that the intangible elements of information and knowledge on a magnetic tape should be separated from the physical medium of the tape in determining tax liability.

"The material used in the making of a phonograph record probably costs only a few cents," said Rodowsky, quoting from a Tennessee court case. "The voice of a Caruso recorded thereon makes it sell for perhaps a dollar. To measure the sales tax only by the value of the physical material in this phonograph record is to apply an impossible formula."

Both recorded music and computer programs consist of blocks of information that pass over magnetized heads, causing "minute currents to flow in such a way that desired physical work is accomplished," the court said.

"We do not discern any legally significant difference for sales tax purposes between the canned computer program on magnetic tape and music on a phonograph record," the court said.

Stephen M. Cordi, sales tax division chief in the state comptroller's office, said today's ruling "to a large degree preserves the status quo."

Most canned programs are small-scale items sold as part of home computers and video games throughout the state, he said. The sales tax on such programs is small, he said, and most retailers collect and pay it. Some banks, insurance firms and other buyers of specialized "big ticket" programs, however, must pay the sales tax themselves, Cordi said, and have resisted it.