Did a reseller make a taxable use of a software disk by remotely transmitting its contents instead of reselling the disk?

Plain-English summary

A requester asked why former Annotation 120.0016 had been deleted and whether the rule in its first paragraph remained valid.

Tax counsel reaffirmed that rule. When a seller buys a software program on disk under a resale certificate but remotely transmits the disk's contents to a customer, the seller does not resell the disk. It instead uses the disk in California and owes use tax measured by its cost of the program under section 6094 and Regulation 1669. A later retail sale of that same disk to someone else would not erase the earlier taxable use.

The letter says the former annotation was deleted because of its second paragraph, not because this first-paragraph principle was invalid. Counsel recommended publishing the reaffirmed rule as a new annotation.

Citations and references

• California Revenue and Taxation Code section 6094 (as cited)
• California Sales and Use Tax Regulation 1669 (as cited)
• Former Board of Equalization Annotation 120.0016 (discussed in the source)

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/120-0855.pdf

Original ruling text

120.0855
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE: (916) 324-2637
FAX : (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
_______

February 21, 1997
REDACTED TEXT
Santa Clara, California 95054

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_______
E. L. SORENSEN, JR.
Executive Director

Re: Deleted Annotation 120.0016
Dear Ms. REDACTED TEXT
This is in response to your January 14, 1997 letter to Ms. Sharon Jarvis regarding deleted Annotation 120.0016. You ask about the Board hearing that prompted the deletion of this annotation and whether the principles from the first paragraph of this annotation still apply. Annotation 120.0016 was deleted as the result of a hearing involving Systec Business Systems, Inc. The hearing was held in Culver City, California and took place on November 30, 1994. You should contact the Board Proceedings Unit at (916) 322-2270 if you are interested in ordering a copy of the transcript from that hearing. You also ask about the language contained in paragraph one of deleted Annotation 120.0016. That paragraph stated: “If a seller purchases a software program on disk for resale and transmits the contents of the disk to the customer by remote telecommunications, the seller has made a taxable use of the program, and owes use tax measured by the cost of the program.” This language is consistent with the Sales and Use Tax Law and is an accurate statement of how tax applies under the facts of that annotation. That is, tax applies on the sales price of tangible personal property purchased under a resale certificate where that property is used inside this state for purposes other than retention, demonstration or display. (See Rev. & Tax. Code § 6094; Reg. 1669.) A person who transmits the contents of a computer disk to its customer is not reselling the disk itself. Rather, that person uses the disk by transmitting the disk’s contents and tax applies on that use whether or not that disk is subsequently sold at retail to a different customer. Annotation 120.0016 was deleted in its entirety based on the second paragraph of that annotation. The deletion of the entire annotation does not mean, however, that the principles set forth in the first paragraph of that annotation are invalid or are otherwise not followed by this agency. I am recommending that the rule set forth in the first paragraph of deleted annotation 120.0016 be annotated to provide clarification to industry. In the meantime, tax applies to situations like that of the first paragraph whether or not there is a specific annotation. I hope this answers your questions. If you have any further questions, please write again.

REDACTED TEXT

Sincerely,

Warren L. Astleford
Tax Counsel
WLA:rz
cc: San Jose District Administrator - (GH)
Mr. David H. Levine
Mr. Robert Nunes (MIC: 40)