Could a buyer exclude the portion of one integrated machinery contract allocated to trade secrets, know-how, and technical information?

Plain-English summary

A California company agreed to pay a Finnish seller $95,000 under one agreement: $60,000 was allocated to trade secrets, manufacturing know-how, technical information, a territorial license, and related rights, while $35,000 was allocated to machinery and equipment for making laminated glass.

Tax counsel concluded that the full contract price measured use tax. The agreement was integrated, and the buyer had to pay all $95,000 to acquire the machinery. The parties' internal allocation between machinery and know-how did not change the total amount for which the tangible property was sold.

The source also said U.S. customs fees on the imported machinery did not eliminate the California use-tax obligation.

Citations and references

• California Revenue and Taxation Code sections 6011 and 6201 (as cited)
• Buyer's Sept. 1, 1970 petition for redetermination arguing that know-how was nontaxable and purchased separately from machinery — position quoted; petition, deficiency notice, audit workpapers, and correspondence not reproduced in the official PDF
• Integrated agreement among the California buyer and two Finnish parties covering $60,000 of trade secrets, manufacturing know-how, technical information, territorial licensing, nondisclosure and facility-inspection rights plus $35,000 of enumerated equipment F.O.B. Helsinki — terms summarized; agreement, equipment list, specifications, invoices, shipping and customs records, and payment records not reproduced in the official PDF
• Audit staff's $95,000 use-tax measure and tax counsel's recommendation to deny the petition — positions supplied; final Board consideration and disposition not supplied in the official PDF
• Official Annotation 295.0370's out-of-state seller, glass-laminating equipment, trade-secrets and know-how allocation, integrated-agreement conclusion, and Nov. 19, 1970 date — annotation omits the petition and audit provenance, Finnish parties, $60,000 and $35,000 allocations, license and other contract terms, F.O.B. Helsinki term, customs-fee point, sections 6011 and 6201, recommendation-only status, missing records, and later outcome and supplies no final Board disposition
• Possible Board decision, redetermination, payment, refund, appeal, import or use record, contract amendment, technology transfer, or other later agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0370.pdf

Original ruling text

295.0370

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
November 19, 1970
Dear Mr. ---:
This is to advise you of the position we have taken in regard to your petition for redetermination of tax dated September 1, 1970. It will be our recommendation to the Board that your petition be denied. The transaction in question involves the purchase by your company, “A”, of certain machinery, parts, and accessories for the manufacture of bent laminated glass, especially windshields, and related technical assistance and “know-how”, from “K” of Finland. According to the terms of the agreement between “A”, “K”, and a certain “F”: (1) In consideration of the payment of “A” to “K” of the sum of $60,000, “K” agreed to disclose to “A” certain trade and manufacturing secrets, know-how, and technical information for the manufacture of laminated glass, whether patented or not. (2) “K” granted to “A” the sole license in a certain defined territory to manufacture and sell laminated bent glass according to the secret process. (3) “K” and “F” covenanted not to disclose the process to any persons not in the territory of “A”. (4)

“A” covenanted not to disclose the process to any other person.

(5)

“K” agreed to allow “A” to inspect its facilities.

(6)
“K” agreed to manufacture and supply certain enumerated items of equipment F.O.B. Helsinki for the price of $35,000. Our audit staff has taken the position that the use tax obligation is properly measured by the full contract price of $95,000. You have taken the position that you “are being taxed on ‘know-how’ in addition to the equipment purchased. ‘Know-how’ is not taxable and was purchased separately from the machinery.” Section 6201 of the California Revenue and Taxation Code provides that a use tax is imposed on the use in this state of tangible personal property purchased from a retailer for use in this state. Basically, then, the use by you of the machinery in question in this state will give rise to use tax

Mr. ---

-2-

November 19, 1970
295.0370

liability. This is so even though you may pay U.S customs fees upon the importation of the machinery into this country. Section 6011 of the code provides that the measure of the tax, the “sales price” of the machinery, “means the total amount for which tangible personal property is sold [including] any services that are a part of the sale.” Where, as here, there is a single integrated agreement for the purchase of machinery and “know-how”, it is our opinion and has been our opinion that “The total amount for which [the] tangible personal property is sold” means and includes all amounts paid under the contract. In order to acquire the machinery, “A” was required to pay $95,000. That the parties may have allocated this amount, for their own purposes, between “processes” and “machinery” is of no relevance under the law. Our recommendation will be presented to the Board for its consideration in due course. Very truly yours,

Gary J. Jugum
Tax Counsel

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