Categorising information: a product, goods or a service?

June 30, 2005

On 12 May the European Court released the opinion of Advocate General Kokott on the reference made to it by the Hoge Raad der Nederlanden (Supreme Court of the Netherlands for the few of us not fluent in Dutch!) in the case of Levob Verzekeringen and OV Bank[1] which requested a clarification of the distinction between goods and services with regard to software. An issue in contention, among others, is whether non-customised software is to be considered a good or a service. The opinion given does not do much to alleviate the confusion that surrounds this contentious area.

While it did address certain aspects of the matter, there is a larger issue to be decided: how are we to classify information – as a product, as goods or as a service? While it is possible to rule on a case-by-case basis, there is certain to be an exponentially increasing number of products being developed as technology progresses, and attempting to force them to conform to our antiquated definitions may create more problems than it solves. I do not think that a satisfactory conclusion can be reached under any of these headings. Is it perhaps time to re-evaluate our categorisation rules and take a more pragmatic approach to this problem?


The European Court was asked to rule on a case where a US supplier had granted a licence in its standard software for a certain amount and provided this software in CD form to Levob employees in the US to carry back to the Netherlands. The US company made a second charge to Levob to customise the software for the Dutch market and a third charge for installation and to train staff. The court was asked whether the supply of software on a carrier medium is the supply of goods or a service and whether the transactions amounted to a single supply or multiple supplies. A further question related to how the customisation of software should be treated.

In the opinion given by the Attorney General, despite the suggestion being put forward that all software in the commercial arena is a right to use and should therefore be classified as a supply of services, it was reiterated that standard software on its own, where transmitted via a tangible carrier medium such as a CD or DVD and not online, should be considered a supply of goods under Article 5.1 of the EC Sixth Vat Directive. She then opined that customised software should be considered a supply of services under Article 6.1 of that Directive.

This does give us certain guidelines to follow and apply to the classification of information, however the Attorney General then went on to suggest that if a programmer designed a programme at his own expense for the customer and then delivered on a tangible carrier medium it could be considered supply of goods. This clearly complicates matters again. The final conclusion reached was as follows:

I propose that the questions from the Hooge Raad should be answered as follows:

1. The supply of standard software on a carrier and the subsequent customisation of it for the needs of the customer must in the sense of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, be regarded as a single supply of services, when the different parts of the supply are so closely bound together that from the point of view of the average consumer they do not have the necessary practical use for the customer on their own. It is not decisive when answering this question whether separate prices were agreed for the various parts, nor whether separate invoices were drawn up.

2. A single supply of services consisting of the supply of the standard software, the customisation of it to the customer’s requirements, installation and training, must be regarded in its totality as a service in the sense of Article 6.1 of the Sixth Directive when, taking all the circumstances into account, the service aspects predominate. This can for example be the case

when the customisation of the standard software is of decisive importance for its use by the acquirer:

when the customisation and installation are so expensive that they cannot be regarded as ancillary services, and

when the service aspects represent the greatest part of the value of the supply.

3. A single supply of services consisting of the supply of the standard software, the customisation of it to the customer’s requirements, installation and training, must be regarded as data processing and the supplying of information in the sense of Article 9.2(e), third indent, of the Sixth Directive (77/388) so that the place of supply is where the customer has established his business

This is of course an opinion of the Attorney General and not the decision of the court, however, if this line of reasoning is followed, it means that not only will national courts have to base decisions on tangibility alone, they must consider the relevance of each factor and formulate some metric to guide their decisions. I think this is a wholly unsatisfactory position and does not give the clarity and decisiveness for which the law must strive. I think it may be time to break the mould and begin considering a sui generis method for categorising information products.

Classification Problems

The problems that are arising and will continue to arise are clear if you consider the example of the view of the EU that software is a service (discussed further below), compared with the view of Canada, as expressed in a letter from the Canadian Advanced Technology Alliance to the Minister for International Trade:; “software must continue to be classified as a good. To classify it as a service could have a devastating effect on the software industry”.[2]

Again, these software classification problems transfer to information classification issues.

Originally the whole distinction between goods and services was developed from the industrial and agricultural ages. This was a somewhat simpler time and the two were distinguished by the reference to a single characteristic, tangibility. This is still the case today as is evidenced from the definition given in most legislation relating to the two. For instance, “Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner . Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5” [3]

These definitions were perfect for a society that was based around the production of tangible objects and the system worked for over a century. However we have now moved into a service dominated society, where information has become the main commodity. It is therefore vital that our legal systems recognise this and adapt. It is no longer black and white which category suits various products. An obvious current example is the dilemma as to whether there should there be a difference between music downloaded from the Internet and music bought on a CD. Traditional methods force us to classify a CD as a good and the transfer of data as a service, but clearly the content remains the same. So should we perhaps be looking towards a content based classification rather than focusing on the physical side? These difficulties were recognised by the WTO a number of years back and have been put before the GATS and GATT for consideration. One of the contributors at the Council for Trade of Goods in 1999 explained this problem clearly. Although they were specifically discussing transactions conducted by electronic means, the argument is the same for information.

“2.8 One delegation believed that it would not be productive to force whatever might transpire through electronic transmissions into familiar categories such as goods or services. All digititalized products could be traded over the internet, and while some products, e.g. software or music, could be stored on carrier media after having been received electronically (thus approximating a good), a carrier media was in many cases unnecessary. Products could also be stored on the computer’s hard drive of the recipient. Exhibiting permanence, but no fixed tangible form, such products would raise questions as to whether they fit into the category of goods or services. The inherently ‘customizable’ nature of many digital products would argue against classifying them as traditional goods. The number of new categories of products made possible by digitalization was limitless. For example, digitalized products often combined elements that in physical applications were separate, such as by combining educational, entertainment and even business applications in a single product.”

While it is easy to categorise some forms of information with the existing methods; a catalogue of suppliers in hard copy is a good, and supply of distance teaching is a service. There are however an increasing number of variations – information that straddles the definitions, fulfilling characteristics we associate with goods but lacking the key characteristic of tangibility. The difficulties this causes are evident in the current battle between Europe, in one corner, and the US and Canada, in the other, on the classification of software. While we in Europe are happy to call software a service, there is staunch opposition on the other side of the pond, most notably from Canada, where it is felt that changing software from a good (as it is over there) would be detrimental to the industry.

While the situation should become somewhat clearer following 12 May, as it stands here, if the software is transmitted via electronic means, it is a service.

“3.9.2 VAT Treatment

In line with international agreements supplies of digitised products are “not goods” in respect of customs duties and VAT.

For VAT and duty purposes, all supplies of digitised products are treated as services. This means that customs duties are not chargeable in the EC.

3.9.1 What is a digitised product?

  • software – “off the shelf” or customised;” [4]

If software is transferred via a tangible method it is a good:

“Export of Goods, Transfer of Technology and Provision of Technical Assistance (Control) Order 2003

“goods” means tangible goods, both used and unused and includes any goods on which “software” or “technology” is recorded;

“software” means one or more “programmes” or “microprogrammes” fixed in any tangible medium of expression;”

This is clearly not an ideal situation. It is somewhat similar to saying that when a solicitor advises a client he is providing a service, but if he writes that advice down on a piece of paper he is selling a good. The strange results that this produces can be seen from the New Zealand Goods and services tax advice:

“For GST purposes, copies of software programs are “goods” while the copyright in relation to software programs is “services”. The supply of copyright in relation to a software program and the supply of a copy of a software program are distinguishable. In the latter there is no transfer of copyright rights.”

“ If software is downloaded directly from an overseas supplier via the internet, it may be noted that the customer acquires data in the form of a digital signal and does not obtain the copyright. None the less that data constitutes services for GST purposes. This is treated as an imported service not subject to GST. However, if the software was downloaded from a New Zealand supplier, GST would be charged” [5]

This approach seems not only to cause confusion and illustrate the need for some sort of common ground, but also to open the door to tax evasion. There is a clear scope for subterfuge and unfair treatment here.

The Canadian and American opposition (to classifying software as a service) is born out of the restrictions that may be placed on services being supplied from outside a country. The GATS is the WTO board responsible for the regulation of services worldwide and, while it is attempting to encourage international trade in services, it is not as yet anywhere near as developed as its older sibling, the GATT. Under the GATS scheme there is still room for barriers such as quotas on services which do not exist under the GATT. According to Patterson of the CATA, the current “software as a good” regime makes market entry easier “allowing companies to sell their product anywhere in the world and encounter fewer problems in giving temporary entry of sales people into other countries and establishing offices abroad”. But if software were to be reclassified under the European service method “countries are free to establish whatever rules they like for services companies”.

Moving towards a Solution

So what are we to do? It seems like there is going to be some difficulty in getting either side to agree to the other’s classification regime, and it is hardly conducive to international trade to have entirely disparate treatment of what is becoming such an integral part of society.

I feel that an example should be taken from the database rights issue. Rather than attempting to force databases to fit under copyright laws, the legislators acted and created a new right. If a more pragmatic approach such as this was taken, a new category of classification might be adopted, based more on content than form, or some new criteria might be decided upon, then there may be a better chance of reaching a globally united position.

It is worth noting the approach being taken by statisticians worldwide. The UN branch responsible for the classification of economic activities [6] has recognised the changing economic landscape and many are confident that a new top tier classification will be added to the international system in 2007 when the next overhaul takes place.

In a proposal put forward by the French Department of Statistics it was stated that:

“Information and intangible products contribute a great part of the value added of most goods and services. In particular, information and other intangibles such as software, database, knowledge, on-line services, know-how, research results, studies and content are in the focus of economic activity. For production activities intangibles are as necessary as energy, physical input or manufactured equipment. In other words, the creation, trading and distribution of intangibles requires the same attention as processing material input into material output. The traditional binary distinction between physical and non physical production, between manufacturing and non manufacturing industries has lost its relevance for economic description and analysis.” [7]

I think the legislators, WTO, EU and others, should take an example from the American SIC where they clearly illustrated the problem:

“At the time, the U.S. Standard Industrial Classification (SIC) system was out of date and its architecture had remained almost unchanged since its introduction in the mid-1930s. The original SIC described an economy that was primarily agricultural- and industrial-based. Despite subsequent revisions up to 1987, the SIC continued to be widely regarded as inadequate in its ability to reflect the emerging technology sectors, the growth of service industries, and the importance of trade and the global economy.”

The SIC also recognised the need for a new approach and not just a rehashing of old methods:

“For the first time ever, the intangible and unique quality of information and cultural products was recognised. Unlike goods and services, information and cultural products derive their value from their information, educational, cultural, or entertainment content and not from their tangible properties. In addition, the unique processes involved in their production and distribution, justified the creation of an Information Sector, distinct from the goods-producing and service-producing sectors.” [8]


I feel there is a very real need to address this issue as soon as possible and attempt to reach an international consensus. In working together to produce a novel approach to the classification and treatment of information, opposing parties are more likely to reach a mutually acceptable conclusion. If all sides are involved on the ground-floor, it is possible adequately to address all the concerns.

How the new system would operate is of course a matter for debate and the characteristics to be used in distinguishing various items will require careful consideration. There are reasons why a content based classification may be appropriate, or perhaps a system dealing entirely with information transmitted electronically, but it is vital that a dynamic approach be taken for the continuance of technological growth.

Frazer Hanrahan is an LLM student at Queen’s University Belfast.

[1] Opinion C-41/04 Levob Verzekeringen and OV Bank


[3] Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, Arts 5.1 and 6.1.

[4] Place of supply services – HMRC Reference:Notice 741 (March 2002)

[5] New Zealand Inland Revenue – E-commerce and GST Computer software and intellectual property

[6] International Standard Industrial Classification of all Economic Activities

[7] Towards an Information Society Aggregate in ISIC 2007 -Marc AUFRANT, Jean-Marie NIVLET

[8] Voorburg Group on Services Statistics