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Software as a Service - Supply or Service?

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1.  Where is the software? 

2.  Is it on the cloud? 

3.  Is there a license being acquired or are you acquiring something from an owner's cloud? 

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We need to keep the conversation contained -- we're talking about commercial software, already developed at contractor expense, for which the Government seeks a license.

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It's pretty well known that it's a service if the software is in the cloud. GSA has a special service code for that. See also DFARS Subpart 227.

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Guest Jason Lent
20 hours ago, Vern Edwards said:

*snip*

Just for fun, I'll say that when you use a company's software you are hiring the company to provide information processing services as performed by a surrogate employee (the software) using GFP (the computer). It's like having a contractor employee in the cubicle next to you, doing what you tell him or her ("it") to do. It's not really the software that you care about, it's the quality of the output.

Am I using a multifunction copier as a contractor's surrogate employee to make copies?

Am I using a claw hammer as a contractor's surrogate employee to pound nails into wood?

Am I using a commissioned portrait of myself as a contractor's surrogate employee to secure my ostentatiousness?

(EDIT on the last one): That is, once the portrait is complete and hanging up over my fireplace.

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Am I using a multifunction copier as a contractor's surrogate employee to make copies?

No.

Quote

Am I using a claw hammer as a contractor's surrogate employee to pound nails into wood?

No.

Quote

Am I using a commissioned portrait of myself as a contractor's surrogate employee to secure my ostentatiousness?

No.

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Guest Jason Lent
2 hours ago, Vern Edwards said:

No.

No.

No.

How is software any different, keeping in line with your argument that software is like having a surrogate employee perform work?

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How is software any different, keeping in line with your argument that software is like having a surrogate employee perform work?

1. Software is not tangible. It is information. The only reason we're having this discussion is that there is some disparity in the way that agencies categorize software license acquisitions. As I showed in an earlier post, some agencies categorize such acquisitions as services, some as supplies. We're trying to think of how best to resolve that issue. No such disparity exists with regard to tangible items like copiers (leasing copiers is a service; purchasing them is supplies), hammers, and portraits.

The medium (disk) on which software may be provided to a user, while tangible, is not the object of the purchase. It is merely the means of delivery. Think of it as a shipping container. The software exists independently of such media, which is why the cloud is increasingly used. Who needs a disk?

2. While a copier makes a copy automatically, needing only input, it is a tangible thing. There is no question as to its status as an item of supply. It's not a good analogy for that reason.

3. A hammer is also a poor analogy, both for the reason given in 2, above, and because it cannot drive a nail without the full-time active participation of the user. Software requires only input. It processes data by itself. You know -- automatic data processing.

3. I frankly don't understand your portrait analogy. It seems entirely off the mark to me. I just don't get it.

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Appears to be a "gray area" to me😄 See recent discussion...

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It is! It is a gray area!  That's why we can have fun with it. :) Brain exercise. They want us to think outside the box. Innovate. We can do that here.

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I always thought of software as instructions more than information.  It instructs your computer to perform the physical task of shooting photons at your eyeballs.

Here's an analogy: Sheet music is instructions to a musician to perform certain physical actions.  The paper the sheet music is printed on is the physical container for the instructions.  I'd still have to pay Boosey & Hawkes if I perform their music from memory, though.

Don't know where I'm going with this, or if this analogy is useful.  Is sheet music a supply?  I think it is.   The musician's time and effort is a service. The *sound* that comes out of the musician is the end product, though.  What is that?

Sometimes the musician is a robot (or synthesizer) and the service aspect is removed.

(Sheet music is almost exclusively black and white.  Rarely gray.  Or grey.)

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Guest Jason Lent
31 minutes ago, Vern Edwards said:

1. Software is not tangible. It is information. The only reason we're having this discussion is that there is some disparity in the way that agencies categorize software license acquisitions. As I showed in an earlier post, some agencies categorize such acquisitions as services, some as supplies. We're trying to think of how best to resolve that issue. No such disparity exists with regard to tangible items like copiers (leasing copiers is a service; purchasing them is supplies), hammers, and portraits.

The medium (disk) on which software may be provided to a user, while tangible, is not the object of the purchase. It is merely the means of delivery. Think of it as a shipping container. The software exists independently of such media, which is why the cloud is increasingly used. Who needs a disk?

2. While a copier makes a copy automatically, needing only input, it is a tangible thing. There is no question as to its status as an item of supply. It's not a good analogy for that reason.

3. A hammer is also a poor analogy, both for the reason given in 2, above, and because it cannot drive a nail without the full-time active participation of the user. Software requires only input. It processes data by itself. You know -- automatic data processing.

3. I frankly don't understand your portrait analogy. It seems entirely off the mark to me. I just don't get it.

The purpose of the portrait analogy is to argue using an example of something that the value (and thus function) of some *thing* (that is, the painting is a *thing* I can touch) can be intangible, yet that value (and thus function) still lingers once it leaves the possession of its producer. I concede my analogy is sloppy, but trying to argue how commercial software licenses would be always best labeled as a supply is difficult.

The physical tangibility of the medium is irrelevant. I use a key to open my front door, and that key needs to hold certain information in order to provide the desired outcome (the door locking or unlocking).

The functionality of a license key indistinguishable from a physical key; when you are purchasing commercial software, you are purchasing a digital key.

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The purpose of the portrait analogy is to argue using an example of something that the value (and thus function) of some *thing* (that is, the painting is a *thing* I can touch) can be intangible, yet that value (and thus function) still lingers once it leaves the possession of its producer. I concede my analogy is sloppy, but trying to argue how commercial software licenses would be always best labeled as a supply is difficult.

What?! Honestly, Jason, that first sentence is simply awful. Let's not linger on it. Let's put it behind us. Let's just go directly to your concession and leave it at that.

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The physical tangibility of the medium is irrelevant.

What's your point? I don't see an argument. So what that you think tangibility is irrelevant? You're entitled to your opinion, but the mere fact that you hold that opinion isn't persuasive of anything, even if I knew what it is you are trying to persuade me of. Declare whatever you want to be irrelevant. A declaration is just that. It's not an argument.

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The functionality of a license key indistinguishable [sic] from a physical key; when you are purchasing commercial software, you are purchasing a digital key.

Wrong on the facts. When you purchase a software license you purchase permission to use the software in certain ways. The digital key is just a mechanism that gives you access to what you've purchased permission to use.

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Software is covered by copyright and can be thought of as text, as that is what it is.  The fact that information can be input and different information is output doesn't make it any more a service than a calculator (which will output information after you input).

Software is a product just like a manufactured supply.  Contractor personnel labor to produce the end product.

Software leases grant use of the product for a period of time just as if we're buying the use of other supply products for a period of time (e.g. cars, equipment, hotel rooms).

Software and software leases are supplies.

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Software leases grant use of the product for a period of time just as if we're buying the use of other supply products for a period of time (e.g. cars, equipment, hotel rooms).

Emphasis added.

Where did you get your information? According to the PSC Manual, renting (leasing) equipment is a service, Category W. Lodging, Hotel/Motel, is a service, Code V231. (Do you really think hotel rooms are supplies? Really? They're real property. See the definition of supplies in FAR 2.101.)

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The fact that information can be input and different information is output doesn't make it any more a service than a calculator (which will output information after you input).

When you buy a calculator you buy a tangible object in which software is embedded. We're not talking about embedded software. Bad analogy.

Think of a software license as a performance-based service contract. You get the license so that the software can work automatically in order to produce a given result or output.

Assert and insist all you want, but it takes more than that. Assertion and insistence is not argument. Come back at me after you've done at least some research. I'm not going to surrender to an unarmed opponent.

 

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FAR 8.1104 Contract clauses directs the inclusion of certain FAR clauses in solicitations and contracts for leasing of motor vehicles.  Specifically, FAR 8.1104(e) directs the K.O. to insert "The provisions and clauses prescribed elsewhere in the FAR for solicitations and contracts for supplies when a fixed-price contract is contemplated..."

One could argue that if fixed price vehicle lease contracts are supposed to be treated as supply contracts, it would be appropriate to treat other equipment lease contracts similarly.  In the alternative, one could argue that equipment leases are generally treated as service contracts, and that is why the FAR explicitly directs use of supply clauses in this case.

In addition, I found this from Leonardo Manning, Director, DAU Center for Contracting:

https://dap.dau.mil/career/cont/blogs/archive/2014/02/10/is-your-acquisition-a-supply-or-a-service.aspx

" Put simply, a commodity or supply is an item that the customer (the Government) can touch or hold in its hands. FAR Part 2 defines supply items as"...all property except land or interest in land..." It does not matter whether the items are owned or leased by the Government."

Personally, I think treating a lease of equipment as a supply makes more sense, but there seems to be plenty of conflicting info and guidance out there.

 

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Guest Jason Lent
2 hours ago, Lionel Hutz said:

FAR 8.1104 Contract clauses directs the inclusion of certain FAR clauses in solicitations and contracts for leasing of motor vehicles.  Specifically, FAR 8.1104(e) directs the K.O. to insert "The provisions and clauses prescribed elsewhere in the FAR for solicitations and contracts for supplies when a fixed-price contract is contemplated..."

One could argue that if fixed price vehicle lease contracts are supposed to be treated as supply contracts, it would be appropriate to treat other equipment lease contracts similarly.  In the alternative, one could argue that equipment leases are generally treated as service contracts, and that is why the FAR explicitly directs use of supply clauses in this case.

In addition, I found this from Leonardo Manning, Director, DAU Center for Contracting:

https://dap.dau.mil/career/cont/blogs/archive/2014/02/10/is-your-acquisition-a-supply-or-a-service.aspx

" Put simply, a commodity or supply is an item that the customer (the Government) can touch or hold in its hands. FAR Part 2 defines supply items as"...all property except land or interest in land..." It does not matter whether the items are owned or leased by the Government."

Personally, I think treating a lease of equipment as a supply makes more sense, but there seems to be plenty of conflicting info and guidance out there.

I think Vern's argument focuses on the fact that a vehicle is a tangible thing whereas software is not.

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In an effort to determine if a purchase of existing software is generally considered as a purchase of "goods" or "a service" in business law, I searched Google.com using the key phrase: "is software purchase under ucc article 2 goods".  This article addresses the issue from the legal perspective:

https://www.uakron.edu/dotAsset/ca5ba1c1-239f-47a3-b4a9-4729c5304fb1.pdf

i had earlier gone down the sales tax rabbit hole, in an effort to see if software purchases are generally taxed as goods or exempt from sales taxes as services.  There is too much inconsistency between tax jurisdictions these days to use sales taxes as a qualifier to establish a commercial software purchase as an example of buying supplies (outside of The Federal acquisition system).   

 

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I haven't read it yet, but note that the article that Joel has provided is dated 1987 and is almost 30 years old. A lot can happen in courts over the course of 30 years, especially with respect to topics as dynamic as information technology and intellectual property. Don't get too excited, one way or another.

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7 minutes ago, Vern Edwards said:

I haven't read it yet, but keep in mind that the article that Joel has provided is dated 1987 and is almost 30 years old. A lot can happen in courts over the course of 30 years, especially when dealing with topics as dynamic as information technology and intellectual property. Don't get too excited, one way or another, until someone checks the current state of the law.

I forgot to check the date of the article.  

I know that a lot of changes have occurred in the taxing jurisdictions as they dig deeper into our pockets to ever expand what they can tax.  

As Vern said, a lot can happen over 30 years in the area of business law. 

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Examples of more contemporary articles include: "The Undue Reliance on Physical Objects in the Regulation of Information Products," by Pascale Chapdelaine," in Journal of Technology Law & Policy (June 2015), 20 J. Tech. L. & Pol'y 65 and "Installation Failure: How the Predominant Purpose Test Has Perpetuated Software's Uncertain Legal Status Under the Uniform Commercial Code," by Spencer Gottlieb, in Michigan Law Review (March 2015), 113 Mich. L. Rev. 739. Unfortunately, copyright prevents me from providing copies to everyone. However, the dates on the articles show that this continues to be an issue.

I also remind everyone that the government categorizes acquisitions for at least three related, but not entirely common reasons: (1) to determine what laws and policies apply, (2) to determine what boilerplate contract clauses to use, and (3) for record-keeping purposes. As far as I can tell there is no common and internally consistent system of classification for all three purposes. For example, the definition of "supplies" in FAR 2.101 includes alteration and installation of supplies, and for years contracting personnel have debated whether elevator maintenance and painting were services or construction. 

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You can download a copy of "The Undue Reliance on Physical Objects in the Regulation of Information Products, by Pascale Chapdelaine" from SSRN.com.  I think it is kosher to excerpt a small passage from it (I added the emphasis):

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The peculiarity of the requirement of a physical object for information products to qualify as goods is even more apparent when contrasted to how other areas of law deal with the immateriality of copies of information products. For instance, international classifications (e.g., in the area of trademarks), classify software as goods regardless of the presence of a supporting tangible medium. In the United States, the Copyright Act defines "copy" as: "material objects . . . from which the work can be perceived . . . either directly or with the aid of a machine . . . ." If "copy" was defined narrowly (i.e., as requiring the form of a material object (book, CD, DVD)), innumerable unauthorized copies would not be deemed to infringe copyright. Pointing to the U.S. Copyright Act definition of "copy" as including "immaterial" machine-readable copies, Jean Braucher notes the incongruity that results from not also treating copies of software as goods under sale of goods law: "There is no good reason not to extend this version of tangibility, assuming tangibility is necessary, to the realm of Article 2." "Software copies are perceivable by a machine and in that sense tangible, making them easily ‘things,’ which may not require tangibility."

It's clever to point out the double standard.  Software operated from the cloud or downloaded without a physical object shoots the same photons into your eyes as the software that is installed with a physical CD.  The author notes that we get this when it comes to copyright, but not with software.  I like the argument, too bad it may not be a winning one yet.

I won't link to SSRN since there is some advertising there.  If you want to read more, though, it's free to set up an account and you can create a "briefcase" which is a list of articles you won't get around to reading. If you are curious about anything whatsoever, it's worth setting up an account. 

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Guest Jason Lent
18 hours ago, Vern Edwards said:

What?! Honestly, Jason, that first sentence is simply awful. Let's not linger on it. Let's put it behind us. Let's just go directly to your concession and leave it at that.

What's your point? I don't see an argument. So what that you think tangibility is irrelevant? You're entitled to your opinion, but the mere fact that you hold that opinion isn't persuasive of anything, even if I knew what it is you are trying to persuade me of. Declare whatever you want to be irrelevant. A declaration is just that. It's not an argument.

Wrong on the facts. When you purchase a software license you purchase permission to use the software in certain ways. The digital key is just a mechanism that gives you access to what you've purchased permission to use.

I don't see how a line can be drawn between purchasing (licensing) the software and being granted permission to use that software. The digital key represents delivery of the supply. If you can't access what you've bought, you can't take acceptance of it. Until you hold the key, the seller has not provided you anything of use.

Some especially high-value software uses dongles as a security measure to protect the software from unauthorized distribution. The dongle is a literal key which must be plugged into the computer for the software to work. The software relatively is easy to come by; the key is what makes the software work.

 

P1. Software license keys exist in both physical (tangible) and non-physical (intangible) forms.

P2. The seller of the licensed software controls distribution of the license keys.

P3. Licensed software is useless without the appropriate license key.

P4. An end user cannot accept delivery of the licensed software without delivery of the appropriate license key.

C1: (P2, P3, P4)Therefore, delivery (and acceptance, as appropriate) of a licensed software's appropriate license key constitutes delivery (and acceptance, as appropriate) of the licensed software.

C2: (P1, P4) Therefore, whether the license key is tangible or intangible is irrelevant to delivery of the licensed software.

 

EDIT: Cleaned up phrasing calling software "licensed software".

EDIT 2: Attempted to clarify C1.

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Jason:

???

What bearing does the argument in your last post have on the topic at hand? I mean, you can talk about whatever you like, of course, and you're entitled to your opinion about what you choose to talk about, but I'm not interested in the tangibility or intangibility of digital keys. The question thus far has been whether, in the context of government contracting, a software license is (a) a supply item, (b) a service, or (c) neither. Even if your conclusions were true, what bearing would they have on that issue?

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3 hours ago, Vern Edwards said:

I also remind everyone that the government categorizes acquisitions for at least three related, but not entirely common reasons: (1) to determine what laws and policies apply, (2) to determine what boilerplate contract clauses to use, and (3) for record-keeping purposes. As far as I can tell there is no common and internally consistent system of classification for all three purposes. For example, the definition of "supplies" in FAR 2.101 includes alteration and installation of supplies, and for years contracting personnel have debated whether elevator maintenance and painting were services or construction. 

Right. We need to know the purpose of the classification before we can classify. There is no universal classification system. The response to the question "is software a supply or a service?" should be "for what purpose are you classifying it?"

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