Would a service-agreement label change the tax treatment if a vendor transferred a computer or digital images?

Plain-English summary

Counsel for a company said a vendor stored images on a camera disk and deleted the data after processing, so the vendor did not transfer data to the company. Earlier letters had characterized the arrangement as a computer lease, but the parties called it a service agreement.

Board tax counsel answered conditionally. If the vendor transferred possession of a computer to the company, the transaction would be a lease regardless of its label. If the vendor transferred stored images to the company, either on disk or by loading them into a computer the company possessed, that would be a taxable sale under Regulation 1502. Counsel asked for a detailed description of the actual transaction before giving further advice.

Citations and references

• California Sales and Use Tax Regulation 1502(c)(2) and (c)(4) (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/120-0925.pdf

Original ruling text

120.0925

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
Ph: (916) 445-6450
FAX: (916) 323-3387

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

November 3, 1994
BURTON W. OLIVER
Executive Director

Mr. J--- P. G--I---, G--- & C----- --- --XXXX --- ---, Suite XXXX
--- ---, CA XXXXX
Re:

Combined L---/W--- M---, Inc.
SR -- XX-XXXXXX

Dear Mr. G---:
This is in reply to your latest letter you sent by fax dated September 28, 1994 regarding the application of sales and use tax to charges by a vendor to Combined L---/W--- M---, Inc. (the company). You note that, although your two previous letters characterize the relationship between the vendor and the company as the vendor’s leasing a computer system to the company, the parties called the agreement a "service agreement". You also note the vendor does not take or produce an actual photograph for the company. Rather, the vendor digitally stores the image on a disk in the camera and the deletes the data after the process is complete. You then conclude the vendor does not really transfer data to the company. We believe that, if the vendor transfers possession of a computer to the company, the transaction is a lease regardless of what the vendor and the company call their agreement. Further, if the vendor stores the images on a disk and transfers those images to the company, whether on a disk or by inputting the data containing those images into the computer possessed by the company, the transaction is a sale subject to sales tax. (See Sales and Use Tax Reg. 1502, Computers, Programs, and Data Processing, subds. (c)(2) and (c)(4).)

Mr. J--- P. G---

-2-

November 3, 1994
120.0925

As I noted during our telephone conversations, if you need further information, please provide us with a detailed description of the facts of the transaction. Very truly yours,

Ronald L. Dick
Senior Staff Counsel
RLD:plh
cc:

--- --- District Administrator - --