Was a charge to edit a customer's existing drawing file taxable when the same electronic medium was returned?

Plain-English summary

A CAD business had originally created electronic drawing files. Its customer later requested additions and deletions, which the business made manually by keystroke before returning the files on the same medium and billing an additional modification charge.

The letter said the modification charge was taxable. It treated the work as physically altering or modifying customer-furnished tangible property, including recording or incorporating information on cards, tapes, disks, or similar media.

The broader letter also said the object of the company's drafting contracts was the drawing output rather than the design service, making specially ordered detailed drawings sales of tangible personal property under the cited authority.

Citations and references

• California Revenue and Taxation Code sections 6006 and 7056 (as cited)
• California Sales and Use Tax Regulation 1502(c)(2) (as cited)
• Albers v. State Board of Equalization, 237 Cal.App.2d 494 (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/120-0125.pdf

Original ruling text

120.0125

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
MATTHEW K. FONG
Fourth District, Los Angeles

March 23, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. B--- A--XXXX Xth Street
---, CA XXXXX
Dear Mr. A---:
This is in reply to your January 9, 1992 letter regarding the application of sales tax to your charges for Computer Aided Drafting (CAD) support activities. You note that you believe that the true object of your contracts is the services rendered in producing the output and not the output itself. Under the Sales and Use Tax Law, the transfer of title or possession of tangible personal property for a consideration is a sale. Although a great deal of the value of the tangible personal property you provide is the result of your labor, nonetheless, the object of your client’s contract is the output. Revenue and Taxation code section 6006 defines sale to include a transfer for a consideration of the title or possession of tangible personal property which has been produced or fabricated to the special order of the customer. The California Court of Appeals held in Albers v. State Board of Equalization, 237 Cal.App2d 494, that, when a draftsman makes detailed drawings based upon specifications furnished by his or her customer, the true object of the transaction is the drawings and not the designs or specifications pictured therein. Such transactions are sales under subdivision (f) of section 6006. You note also that you are concerned that all California companies conducting activities such as your are treated the same under the law. You asked how you can ascertain whether such companies are charging sales tax reimbursement or use tax on their sales. This Board is prohibited, pursuant to Revenue and Taxation Code section 7056, from making known in any manner any information pertaining to any person required to report to the Board. We suggest then that you contact the businesses to determine whether they consider their charges as subject to tax. You may then provide any information you deem necessary to this Board’s Compliance

Mr. B--- A---

-2-

March 23, 1992
120.0125

Planning Unit at this address. You earlier sent a list of similar businesses. I am sending that list to the Compliance Planning Unit with a copy of this letter. Finally, you note the following facts regarding a recent request from a customer to modify existing electronic files of information: “These files had originally been created by my company. The customer then decided certain changes (additions and deletions) would be required. The service of modifying the data was manually completed using keyboard strokes and the files were returned to the customer on the same medium. No new materials inputs were required, nor were the existing files’ data electronically processed. The customer was billed an additional charge for the service of making the requested changes to the drawing data. (Information removed from layer X and placed on layer Y of the existing drawing file.)” The charges you described are subject to tax. As provided at subdivision (c)(2) of Regulation 1502: “Charges for producing, fabricating, processing, printing, imprinting or otherwise physically altering, modifying or treating consumer-furnished tangible personal property (cards, tapes, disks, etc.), including charges for recording or otherwise incorporating information on or into such tangible personal property are generally subject to tax.” We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:sr
Enc.
cc:

Compliance Planning Unit