How did California tax Internet-access fees and CD-ROMs that were sold or given to online-service customers?

Plain-English summary

An online data-service company charged customers a monthly fee to connect over the Internet without providing software or hardware. It considered later supplying a CD-ROM that would give customers a more graphical interface.

Tax counsel said charges attributable solely to the online electronic-data-transfer service were not taxable because they were service charges rather than sales of tangible personal property.

If the company charged for both the CD-ROM and monthly access, the part of the total charge attributable to the CD-ROM was taxable. If it transferred the CD truly free—with no consideration and no obligation for the recipient to purchase property or services—the transfer was not a sale. In that second plan, the company was the consumer, so the retail sale of the CD-ROM to the company was the taxable transaction.

Citations and references

• California Revenue and Taxation Code sections 6006(a), 6051, 6201, and 6401 (as cited)
• California Sales and Use Tax Regulation 1501 (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/120-0310.pdf

Original ruling text

120.0310

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: (916) 324-2614
FAX: (916) 323-3387

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

BURTON W. OLIVER
Executive Director

January 17, 1996

Ms. L--- R--XXXX --- Drive
--- ---, California XXXXX
Re: Sale of CD-ROMs
Dear Ms. R---:
This is in response to your letter dated October 27, 1995, regarding the application of tax to the sale of CD-ROMs in connection with an on-line electronic data transfer service provided over the Internet by your company. You state: “Initially we will be offering electronic data transfer only and each member will pay a monthly fee to ‘dial in’ to our service over the Internet. We will not provide the member with any software or hardware for this transaction. We understand that this service is not subject to sales tax. Eventually we may offer a CD-ROM to members that will give them a more graphical interface when connecting to us over the Internet. Our question then is, what becomes subject to sales tax? There are two possible scenarios: Plan 1: We charge for both the CD and the monthly connection over the Internet. Plan 2: We give away the CD’s free of charge but still charge for the monthly connection over the Internet.”

Ms. L--- R---

-2-

January 17, 1996
120.0310

DISCUSSION
Retail sales of tangible personal property in California are subject to sales tax, measured by the gross receipts, unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) The term “sale” means any transfer of title or possession of tangible personal property for consideration. (Rev. & Tax. Code § 6006(a).) When sales tax does not apply, use tax, measured by the sales price, applies to the use of tangible personal property purchased from a retailer for the storage, use, or other consumption in California, unless the use is exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401.) Neither the sales tax nor the use tax applies to charges for services not constituting sales of tangible personal property. (Reg. 1501.) Charges attributable solely to the on-line electronic data transfer services provided by your company over the Internet are not subject to tax. The charges are for services not constituting sales of tangible personal property. With regard to the transfer of the CD-ROM, under “Plan 1,” you state that your company would charge for both the CD-ROM and the monthly connection over the Internet. Under these circumstances, the transfer of the CD-ROM constitutes a sale of tangible personal property. Therefore, the amount of the total charge attributable to the sale of the CD-ROM is subject to tax. Under “Plan 2,” you state that your company would give away the CD-ROM free of charge and only charge for the monthly connection over the Internet. We assume that you mean that the CD-ROM is transferred to a customer with no consideration given in return and no obligation on the part of the customer to purchase any tangible personal property or any services from your company. Such a transfer does not constitute a sale of tangible personal property. Therefore, the transfer of the CD-ROM is not subject to tax. This means that you are the consumer of the CD-ROM and the sale of the CD-ROM to you is the taxable retail transaction. If you have any questions, please feel free to write again. Sincerely,

Sophia H. Chung
Staff Counsel
SHC:rz
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cc: --- --- District Administrator (--)