Which parts of a hospital technology agreement were subject to California use tax: software, leased modems, or remote-system access?

Plain-English summary

A technology provider sold application software to a California hospital for $1,379,501, leased modems, and provided access to an information-systems center in Pennsylvania.

Staff said the hospital's software purchase and any other tangible deliverables bought for California use were subject to use tax. The provider, assumed to be a retailer engaged in business in the state, had to collect the tax.

The portion of the $10,000 monthly charge attributable to leasing modems in California also was taxable as rentals were paid. The portion attributable only to access to the out-of-state information center was not taxable. Two referenced exhibits were unavailable, so the opinion did not classify their deliverables.

Common questions

Was the purchased application software taxable?

Yes, under this 1994 opinion.

Were the leased modems taxable?

Yes, based on the rental-charge portion.

Was remote information-system access taxable?

No, according to the letter.

Did staff decide the treatment of every contract deliverable?

No. It did not have Exhibits B or D-1.

Citations and references

• California Revenue and Taxation Code sections 6201 and 6203 — use tax and retailer collection duty applied
• California Sales and Use Tax Regulation 1660, “Leases of Tangible Personal Property—In General,” and subdivision (c)(1) — use tax on modem rentals discussed; a copy was enclosed

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/175-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/175-0149.pdf

Original ruling text

175.0149
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

April 6, 1994

REDACTED TEXT

Re:

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

REDACTED TEXT

Dear REDACTED TEXT:
As you know, your November 12, 1993, letter to Mr. Robert Nunes has been referred to the legal staff for reply. You asked for the application of California sales and use tax to charges by REDACTED TEXT to REDACTED TEXT Hospital pursuant to a December 11, 1990 agreement. You have since sent a copy of the agreement and a copy of some of the relevant exhibits. We understand that REDACTED TEXT sold applications software to the hospital, leases modems to the hospital, and allows the hospital access to REDACTED TEXT’s information systems center in REDACTED TEXT, Pennsylvania. California imposes a use tax 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.) As a retailer engaged in business in this state, REDACTED TEXT is required to collect the use tax from the purchaser, when it makes such a retail sale. (Rev. & Tax Code § 6203.) Under the agreement, REDACTED TEXT transfers to the hospital software listed in Exhibit A for a charge of $1,379,501. The hospital’s purchase of the software for use in this state is subject to use tax. Tax also applies to other tangible personal property the hospital purchases from REDACTED TEXT for use in this state. For instance, it appears that REDACTED TEXT transfers “deliverables” described in Exhibit B or D-1. We do not have a copy of those exhibits. We understand that REDACTED TEXT provides the hospitals with modems and access to the information systems center for a charge of $10,000 per month. Generally, REDACTED TEXT’s lease of the modems to the hospital in this state is subject to use tax. REDACTED TEXT must collect the tax from the hospital at the time rentals are paid by the lessee. (Sales and Use Tax Reg. 1660, Leases of Tangible Personal Property - In General, subd. (c)(1).) A copy of Regulation 1660 is enclosed for your further information. The amount of REDACTED TEXT’s monthly charge attributable to the leases of the modem is subject to use tax. Tax does not apply

REDACTED TEXT

-2-

April 6, 1994
175.0149

to the amount of the monthly charge attributable to REDACTED TEXT allowing the hospital access to the information systems center. Very truly yours,

Ronald L. Dick
Staff Counsel
RLD:plh
Enclosure