How were hardware, software, mandatory support, employee travel, installation, site preparation, and transportation charges treated?

Plain-English summary

Retail sales of computer hardware, miscellaneous supplies, repair parts, and prewritten licensed or sublicensed software were taxable. A maintenance contract or monthly hotline-support fee was also taxable when the customer had to buy it as a condition of purchasing the property.

Installation labor was excluded, including testing a prewritten program on the purchaser's computer to confirm that it operated as required. Site preparation was not treated the same way. Because employee travel expenses related to both taxable site preparation and excluded installation, the seller had to apportion those travel charges between the two activities.

Separately stated transportation from the seller's place of business or other shipment point directly to the purchaser was excluded under the cited transportation rule. The letter also noted that district transactions and use taxes could add to the general state and local rate depending on location.

Citations and references

• California Sales and Use Tax Regulation 1502(f)(1) (as cited)
• California Sales and Use Tax Regulation 1546 (as cited)
• California Sales and Use Tax Regulation 1628 (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/120-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/120-0015.pdf

Original ruling text

120.0015

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

June 9, 1989

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
BURTON W. OLIVER
Executive Director

REDACTED
TEXT
Re:

REDACTED TEXT

Dear Ms. REDACTED TEXT:
This is in reply to your April 14, 1989 letter regarding the application of sales tax to charges by REDACTED TEXT. You noted the following facts: “REDACTED TEXT purchases computer hardware and sublicensed software, and then resells it to hospital laboratories. The hospitals pay for routine maintenance as well, which is provided by our third party equipment vendors. Our clients also purchase canned licensed software from REDACTED TEXT. A monthly support fee for each module is billed to the client for hotline assistance, etc. These charges are also separately stated on an invoice. “Some other items sold to our clients include miscellaneous supplies and repair parts. REDACTED TEXT employees travel to the client sites in order to prepare the site and install the hardware and software. We bill the client for the actual travel expenses on a separate invoice as they are incurred. These expenses are airfare, lodging per diem, and ground expenses. “Also, we bill clients for transportation charges which include Federal Express, United Parcel Service, and third party equipment vendors that REDACTED TEXT uses to deliver equipment, media, etc. to the client sites.”

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Given this information, you have provided a questionnaire and asked that we note whether each itemized charge is taxable or nontaxable. Because of the complexity of the Sales and Use Tax Law, we are unable to provide you with a simple “yes” or “no” answer to the taxability of your charges. Therefore, we will provide the following explanation. Sales or use tax applies to REDACTED TEXT’s retail sale of computer hardware, miscellaneous supplies and repair parts, and pre-written licensed and sublicensed software. If the client is required to purchase a maintenance contract as a condition of REDACTED TEXT’s sale of the property, then tax applies to REDACTED TEXT’s charge to the client for the maintenance contract. The application of tax to REDACTED TEXT’s furnishing of parts pursuant to a maintenance contract is provided in Sales and Use Tax Regulation 1546, Installing, Repairing, Reconditioning in General. Assuming that the monthly support fee for the hotline assistance is also a mandatory charge to the client, tax applies to such charge. You noted that REDACTED TEXT charges its clients for travel expenses of REDACTED TEXT’s employees who travel to a client’s site to prepare the site and install the hardware and software. As noted in Regulation 1546 at subdivision (a): "Charges for labor or services used in installing or applying the property sold are excluded from the measure of the tax. Such labor and services do not include the fabrication of property in place." “Charges for testing a pre-written program on the purchaser’s computer to insure that such a program operates as required are installation charges and are nontaxable. (Sales and Use Tax Reg. 1502 (f) (1) last paragraph.) Since REDACTED TEXT’s charge to the client for the employees’ travel expenses is attributable to both site preparation and installation, REDACTED TEXT’s charge to the client for the travel expenses must be apportioned between any taxable charges for site preparation and the nontaxable charges for installation of the property sold. Tax does not apply to REDACTED TEXT’s separately stated charges for transporting property from REDACTED TEXT’s place of business or other point from which shipment is made directly to the purchaser. The application of tax to REDACTED TEXT’s transportation charges is provided in Sales and Use Tax Regulation 1628, Transportation Charges. Finally, you asked whether the tax rate varies among cities and counties. Certain districts in California impose a transactions and use tax which is in addition to the general six percent state and local sales and use tax. Enclosed in a copy of the Board’s Pamphlet 44, Tax tips for District Taxes, and Pamphlet 44-A which provides a list of the various districts which impose the additional taxes.

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We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours, Ronald L. Dick Tax Counsel RLD/smt:1421C Enclosures:

Regulation 1502/ 1546, 1628
Tax Tip Pamphlets 44 and 44-A