Was an insurance holding company's one-time $150,000 sale of in-house software exempt as an occasional sale?

Plain-English summary

The insurance holding company developed software for internal use and sold it on tangible media to an unrelated insurance company for $150,000. Because the seller was only a holding company—not an authorized insurer paying California gross-premiums tax—it did not receive the insurance-company “in lieu” sales-tax protection.

The sale could still be exempt as an occasional sale. The Board would count all tangible-property sales, including sales to subsidiaries, not just software. Three or more substantial sales—or a substantial number of smaller sales—within twelve months could require a seller's permit and defeat the exemption. Positive steps to market the software could also make the company a seller required to hold a permit.

If the company made only this sale, made no other tangible-property sales, was not trying to sell the software, and did not make two more property sales within twelve months, the transfer qualified as an exempt occasional sale.

The buyer's insurer status did not exempt a non-insurer seller's California sales tax. If no sales tax applied and the buyer was itself an authorized insurer paying gross-premiums tax, the buyer's use could be exempt under Regulation 1567(b).

Common questions

Did calling the transaction “one-time” settle the occasional-sale issue?

No. California also considered every other tangible-property sale and whether the company was actively offering the software for sale.

Did ownership by an insurance group make the holding company an insurer?

No. The letter assumed the holding company itself was not authorized to sell insurance and did not pay the gross-premiums tax.

Citations and references

• California Revenue and Taxation Code sections 6006.5(a), 6014, 6066, and 6367 (occasional sales and seller's permits, as cited)
• California Revenue and Taxation Code sections 6007, 6051, 6201, 6203, and 6401 (sales and use tax framework, as cited)
• California Civil Code section 1656.1 (sales-tax reimbursement, as cited)
• California Sales and Use Tax Regulations 1502, 1567(b), and 1595(a)(1) (software, insurers, and permit thresholds, as cited)
• California Constitution article XIII, section 28(f) and Mutual Life Insurance Co. of New York v. City of Los Angeles (1990) 50 Cal.3d 402 (insurance “in lieu” tax, 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/135-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/135-0310.pdf

Original ruling text

135.0310
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District, Kentfield

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

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

September 22, 1993

GRAY DAVIS
Controller, Sacramento
BURTON W. OLIVER
Executive Director

REDACTED TEXT
Dear REDACTED TEXT:
This is in response to your inquiry of July 1, 1993, regarding the sales and use tax consequences of the computer software your company sold. You state that: “REDACTED TEXT is an insurance holding company and is not in the software sales business. During the past several years our company programmers developed an in-house software system that we use to run our insurance business. “Recently, another insurance company became interested in the software and as a result, REDACTED TEXT sold them the application for $150,000. To the best of my knowledge, this was a one time event unless, of course, still another insurance company comes along that wants to buy it. “Under regulation 1502 a definition of a (Prewritten Program) includes a program developed for in-house use which is subsequently offered for sale. On that basis alone it would seem that the sale was a taxable event. However, under regulation 1595 covering (Occasional Sales) it states that tax does not apply to a sale of property held or used in the course of an activity not requiring the holding of a sellers permit. Based on the guidelines contained in that regulation we would not be required to hold a seller’s permit.” Since you state that REDACTED TEXT is an insurance holding company, we assume that it is not itself an insurance company authorized to do insurance business by the California Department of Insurance and that it does not pay the insurance gross premiums tax. Further, we assume when you say REDACTED TEXT sold to “another insurance company” you mean an insurance company not owned by REDACTED TEXT. We assume that by “this was a one-time event,” you mean that REDACTED TEXT has made only one sale of the software to an unrelated insurance company. We assume REDACTED TEXT transfers the software in question on tangible storage media. You ask whether your sale of the software qualifies as an exempt occasional sale. I will also address the issue of the application of sales and use tax to sales to an insurance company. Sales and Use Tax Law – In General Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their

gross receipts from retail sales of tangible personal property occurring in this state. The sales tax is imposed upon the retailer, but the retailer may collect sales tax reimbursement (usually itemized on the invoice as “sales tax”) from the purchaser if the contract of sale so provides. (Civ. Code § 1656.1.) “A ‘retail sale’ or ‘sale at retail’ means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property.” (Rev. & Tax Code § 6007.) A use tax is imposed on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer for storage, use, or other consumption in this state. (Rev. & Tax. Code § 6201.) A retailer engaged in business in this state must collect the use tax from the purchaser and pay it to this state. (Rev. & Tax. Code § 6203.) Generally, if a sale of property is subject to sales tax, the storage, use, or other consumption in this state, of the property, is exempt from use tax. (Rev. & Tax. Code § 6401.) If a sale of property is not subject to sales tax, the storage, use, or other consumption in this state, of the property, is subject to use tax unless an exemption applies. Occasional Sales and Seller’s Permit Under Revenue and Taxation Code section 6006.5(a), an occasional sale includes: “A sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller’s permit or permits or would be required to hold a seller’s permit or permits if the activities were conducted in this state, provided the sale is not one of a series of sales sufficient in number, scope, and character to constitute an activity for which he or she is required to hold a seller’s permit or would be required to hold a seller’s permit if the activity were conducted in this state.” Occasional sales, as defined above, are exempt from sales and use tax. (Rev. & Tax. Code § 6367 (this exemption does not apply to sales of vehicles, vessels, or aircraft).) Regulation 1595(a) (1) provides that persons making 3 or more sales for substantial amounts, or a substantial number of sales for relatively small amounts, in a 12 month period, are required to hold a seller’s permit. Thus, if REDACTED TEXT made three or more sales of tangible personal property for substantial amounts or made a substantial number of sales for relatively small amounts, in any period of 12 months, REDACTED TEXT would be required to have a seller’s permit. We will look to all REDACTED TEXT’s sales of tangible personal property, not just its software sales, in determining whether the sale of software was one of a series of sales for which a permit was required. If it was, its sales (including its sale of the software) do not qualify for the occasional sale exemption. There is an additional reason that REDACTED TEXT may have been required to have a seller’s permit. Revenue and Taxation Code section 6014 defines “seller” to include every person engaged in the business of selling tangible personal property, and Revenue and Taxation Code section 6066 requires every such seller to obtain a seller’s permit. You state: “To the best of my knowledge, this was a one time event unless, of course, still another insurance company comes along that wants to buy it.” If REDACTED TEXT is taking any positive steps to offer the program for sale (e.g., advertising it for sale or in some other manner letting the industry know the program is for sale), REDACTED TEXT is a seller under Section 6014 and is required to hold a permit by section 6066. If so, its sale of the software was not an occasional sale. If REDACTED TEXT has made only one sale of the software, made no other sales of tangible personal property, and is not trying to sell the software, then the sale of the program is an

occasional sale as long as REDACTED TEXT does not make two or more other sales of tangible personal property within 12 months of this sale. If REDACTED TEXT transferred the software to its subsidiaries by selling it to them (or made sales of any other tangible personal property to its subsidiaries), these sales are also considered when determining the number of sales within a 12 month period. If this is an occasional sale, the sale is exempt from tax. Sales by Insurance Companies Section 28 of Article XIII of the California Constitution provides generally that insurance companies doing business in California must pay the state a tax based on gross premiums. Section 28(f) of Article XIII of the California Constitution provides that the gross premiums tax on insurance companies is “in lieu” of all other taxes, with certain exceptions not relevant here. Mutual Life Ins. Co. of New York v. City of Los Angeles (1990) 50 Cal.3d 402 held the “in lieu” provision applied to all activities of an insurance company. If you had been a company selling insurance, registered to do business as an insurance company with the Department of Insurance and paying gross premium tax, your sales of the computer software would not be subject to sales tax because the gross premium tax you would have paid is “in lieu” of all other taxes. However, even when sales tax does not apply to sales by insurance companies, if they are seller’s required to hold a seller’s permit, they are required to collect use tax from consumers when making sales of tangible personal property. (Reg. 1567(b).) Therefore, even if you were an insurance company and not subject to sales tax, you would generally be required to collect use tax from purchasers of your software. Based on our understanding that REDACTED TEXT is not itself an insurer, it would not be exempt from sales tax on its sales. Similar to the discussion above, use tax does not apply in this state to the storage, use or other consumption of tangible personal property by insurance companies. (Reg. 1567 (b)). Thus, if you had sold the software to a company selling insurance, registered to do business as an insurance company with the Department of Insurance and paying gross premium tax, use tax would not apply. However, if the company you sold the software to is not itself an insurer, it would not be exempt from use tax on this sale. In summary, if the sale of the software was an occasional sale as discussed above, neither sales nor use tax applies. If the sale does not qualify as an occasional sale, sales tax applies if the seller is not an insurance company, without regard to whether the purchaser is an insurance company. If the seller is an insurance company, use tax would apply if the purchaser is not an insurance company. However, even if the sale does not qualify as an occasional sale, neither sales nor use tax applies if both the seller and the buyer are insurance companies paying the California gross premiums tax. If you have any further questions, please feel free to write again. Very truly yours,

Rachel M. Aragon
Staff Counsel