Were custom embroidery designs delivered on punched paper tape or diskette taxable as computer programs?

Plain-English summary

A Board deputy director asked how sales and use tax applied to punched paper tapes and diskettes containing instructions for embroidery machines.

Tax counsel concluded that a person who creates an embroidery design to a customer's special order and supplies it in machine-readable form is performing a custom computer-programming service. Under section 6010.9 and Regulation 1502, tax did not apply to that custom program merely because it was transferred on punched tape or diskette.

The memorandum expressly excluded basic operational programs from this treatment. Its holding therefore turns on a special-order design qualifying as a custom program.

Citations and references

• California Revenue and Taxation Code section 6010.9 (as cited)
• California Sales and Use Tax Regulation 1502 (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/120-3190.pdf

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

Memorandum
To:

Mr. Glenn A. Bystrom
Deputy Director (MIC: 43)

From:

Sophia H. Chung
Tax Counsel

Subject:

Diskettes Used to Operate Embroidery Machines

120.3190
Date: March 25, 1997

Your memorandum dated January 22, 1997, to Mr. Gary J. Jugum, Assistant Chief Counsel, has been referred to me for response. You request a legal opinion addressing the application of tax to sales of punched paper tapes and diskettes containing operating instructions for embroidery machines. As you know, Revenue and Taxation Code section 6010.9, as interpreted by Sales and Use Tax Regulation 1502, provides that tax does not apply to the sale or lease of a custom computer program, other than a basic operational program, regardless of the form in which the program is transferred. Persons who create designs and transfer the designs in machine-readable form to operate embroidery machines are performing custom computer programming services if the designs are prepared to the special order of the customer. In other words, the preparation of punched paper tapes and diskettes used to control the operations of embroidery machines for such purposes constitutes exempt custom computer programming under Revenue and Taxation Code section 6010.9. SHC:rz cc:

Mr. Robert Nunes (MIC: 40)