Was a later fee for an unlock code taxable when the additional software was already stored on the customer's CD-ROM?

Plain-English summary

A multimedia subscription seller delivered a CD-ROM containing several software programs. Customers initially had access to only some programs but could pay by telephone for a code unlocking others already stored on the same disk.

Tax counsel rejected the argument that the later code was a separate electronic transaction. The code payment bought further use of tangible personal property already delivered and therefore formed part of the disk's taxable selling price, even if paid years later.

The source distinguished a remote telecommunications transfer. Such a transfer was nontaxable only when the seller supplied no tangible property such as storage media; here, the customer already possessed the CD-ROM containing the program.

Citations and references

• California Revenue and Taxation Code section 6012 (as cited)
• California Sales and Use Tax Regulation 1502(f)(1)(D) (as cited)
• California Sales and Use Tax Annotations 295.0560 and 295.0570 (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/120-0760.pdf

Original ruling text

120.0760

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 94279-0001)

DEAN ANDAL
Second District, Stockton

Telephone No.: (916) 445-6450
Fax No: (916) 323-3387

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

May 2, 1995

────────
BURTON W. OLIVER
Executive Director

Mr. J--- C---, Jr.
Senior Manager
--- & --- LLP
XX --- Street
--- ---, CA XXXXX-XXXX
Re:

K---, Inc.
SR -- XX-XXXXXX

Dear Mr. C---:
This is in reply to your February 22, 1995 letter regarding sales of CD-ROM disks by your client, K---, Inc. Since we have previously corresponded regarding these transactions, we will summarize the facts here. As part of the sale of a multi-media subscription, K--- sells a CD-ROM disk which embodies software programs. The purchaser of the disk has access only to certain software but may examine demonstrations of other software embodied on the disk. K--- has an "800" telephone number which the purchaser may call to pay a fee to obtain an "unlock code" which enables the purchaser to access other programs on the disk. You believe sales tax applies only to K---'s charge for the initial transfer of the CD-ROM disk and does not apply to K---'s charges for providing access codes. You note you believe the charge for the unlock code should be seen as a separate and distinct transaction from the sale of the disk and title has been transferred and tax reimbursement has been collected on the CD-ROM disk long before K--- provides the unlock code. You believe the unlock code merely facilitates the electronic transmission of the program from the subscriber's disk to the subscriber's computer. You also believe the situation is similar to one where a person purchasers a computer program, and the vendor, under a separate contract, transfers modifications electronically over a modem.

Mr. J--- C---, Jr.

--

May 2, 1995
120.0760

We disagree. When a person purchases a disk from K--- which contains a number of programs, the transfer of the disk containing the programs is a sale of tangible personal property. The payment of a fee to obtain a code to unlock or access the programs on the disk is a payment for use of the disk which is tangible personal property. Under Revenue and Taxation Code section 6012, the taxable gross receipts of K---'s sale are the total amount of the sale price of the disk. The purchaser's having to pay part of the sale price after it receives delivery of the disk in order to make a further use of the disk is not a basis for excluding the amount from K---'s gross receipts of the sale. Obviously, when the purchaser of a disk agrees to pay an amount to K--- in order to use new parts of the disk, the amount is payment for the disk. The communication of a password is merely K---'s means of enforcing the purchaser's obligation to pay for the further use of the disk. The situation is akin to that where a vendor sells tangible personal property for a fixed price and charges a royalty for the purchaser's future use of the property. Payments made years later for the use of the property are part of the taxable selling price. (See Bus. Taxes Law Guide Annots. 295.0560 and 295.0570.) Further, we do not believe the transaction is akin to one where a person makes a nontaxable transfer of information by telecommunications, such as by modem. In that situation, the charge is nontaxable only when the transferor does not provide tangible personal property, such as storage media, in the transaction. (Sales and Use Tax Reg. 1502, subd. (f)(1)(D).) We hope this answers your questions. Very truly yours,

Ronald L. Dick
Supervising Staff Counsel
RLD:sr

cc:

--- --- District Administrator