Which mandatory charges for installing prewritten software and converting customer data were taxable?

Plain-English summary

A health-care software developer sold prewritten programs on storage media and required every customer to buy “installation,” which included both installing the software and converting old customer data into a usable format. The combined charge was separately stated.

Actual installation and testing to ensure the program operated as required were excluded from taxable gross receipts. Data conversion was different: it was not installation under the cited rules.

Because customers could not buy the software without the conversion service, the required conversion charge remained part of the taxable software sale even though separately stated.

Citations and references

• California Revenue and Taxation Code sections 6012, 6012(c)(3), and 6051 (as cited)
• California Sales and Use Tax Regulation 1502(b), 1502(f)(1), 1502(f)(1)(E), and 1502(g) (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/120-0115.pdf

Original ruling text

120.0115
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone No.: (916) 324-2634
Facsimile No.: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

February 14, 1995

BURTON W. OLIVER
Executive Director

REDACTED TEXT
Re:

KATHLEEN CONNELL
Controller, Sacramento

SR AB 18-706135

Dear Ms. REDACTED TEXT:
I am writing in response to your letter dated December 2, 1994 concerning REDACTED TEXT, Inc. (REDACTED TEXT). REDACTED TEXT develops and sells prewritten (canned) computer software to the health care industry. I assume for purposes of this opinion that REDACTED TEXT transfers the software to its customers in the form of storage media, as defined in Sales and Use Tax Regulation 1502(b). You write that REDACTED TEXT never sells its software without also selling the "installation" of the software. "Installation" as defined in your letter "includes installing the software on the clients' system and converting old data into new usable data to be used with our software." Charges for what you refer to as "installation" (hereinafter referred to as "installation and conversion") are separately stated on customer invoices. REDACTED TEXT currently collects sales tax reimbursement from its customers on these charges, but this practice is being questioned by a California customer of REDACTED TEXT. You ask whether the charges are taxable. Discussion Sales tax is imposed upon the gross receipts of retailers for their sales of tangible personal property at retail in California, unless otherwise exempted or excluded by statute. (Rev. & Tax. Code § 6051.) Sales of prewritten computer programs transferred to a customer in the form of storage media are taxable sales of tangible personal property. (Reg. 1502(f)(1).) The taxable gross receipts from a retail sale of tangible personal property include the total amount of the retail sale price, including any amounts paid for services that are a part of the sale, unless such service is excluded by statute. (Rev. & Tax. Code § 6012.) When a customer may not purchase tangible personal property without also purchasing a certain service, that required service is regarded as part of the sale of the property. Therefore, unless otherwise excluded by statute, the charges for such a required service are a part of the taxable gross receipts from the retail sale of the property. (See e.g., Rev. & Tax. Code § 6012(c)(3); Reg. 1502(g).) An example of a charge for a service which is excluded from

Jessica Kuczynski

-2-

February 14, 1995
120.0115

taxable gross receipts is the price received by a retailer for labor or services used to install the property sold. (Rev. & Tax. Code § 6012(c)(3).) In the instance of the installation of a prewritten computer program, installation includes the actual installation of the software, and the testing of the program on the purchaser's computer to insure that the program operates as required. (Reg. 1502(f)(1)(E).) Since REDACTED TEXT transfers the canned programs which it sells to its customers in the form of storage media, those sales are taxable sales of tangible personal property. The installation and conversion services about which you write are required as a part of the sale of that software. Therefore, the charges for those services are a taxable part of the sale unless they are otherwise excluded by the Sales and Use Tax Law. As noted earlier, there is an exclusion for charges for the service of installing prewritten computer programs and testing the prewritten program on the purchaser's computer to insure that the program operates as required. However, this exclusion does not encompass any other services, such as converting a customer's data into a format suitable to be used with new software. (See Reg. 1502(g).) Thus, the portion of REDACTED TEXT's installation and conversion charges which are attributable to the actual installation of the software itself and to the testing to insure that the program operates as required are nontaxable. However, the portion of the installation and conversion charges which are attributable to converting an REDACTED TEXT customer's data to a different format to be used with REDACTED TEXT software are not a part of installation, as that term is defined in the Sales and Use Tax Law. Since the conversion service is a required part of the sales contract, charges attributable to that service are includible in the taxable gross receipts from the sale of the REDACTED TEXT software. I hope this information is of assistance. Please feel free to write again if we may answer further questions. Sincerely, Sharon Jarvis Staff Counsel SJ:es

REDACTED TEXT.ltr

cc:

Torrance District Administrator (AB)