Was labor to replace a motherboard or add memory to a customer's used computer taxable?

Plain-English summary

An absent November 25, 1996 request said T---, Inc. had been collecting tax on labor for computer upgrades such as changing a motherboard from 486 to 586 or adding memory. The full request, computers, ownership and prior-use evidence, parts, charges, invoices, collected amounts, and actual transactions are not reproduced.

California said labor to replace a motherboard or add memory was nontaxable under four express assumptions: the computer was used, it belonged to the customer, the work merely increased its existing memory, and it did not refit the computer for a different use. The motherboard or added memory itself remained taxable.

The result changed when the business installed the parts in a used computer and then sold that upgraded computer at retail. In that situation, both the installation cost and the parts cost were included in the seller's taxable gross receipts for the computer.

Counsel expressly said the opinion did not apply if the assumptions were wrong and invited a new, transaction-specific request. The live Annotation 315.0124 publishes the customer-owned-used-computer result but omits the request, prior tax-collection practice, 486-to-586 example, cited prior annotation, upgraded-for-resale result, missing records, and any later outcome.

Common questions

Was installation labor taxable on the customer's used computer?

No, under the stated upgrade assumptions.

Were the motherboard and memory taxable?

Yes.

What if the business upgraded its own used computer for resale?

The entire retail charge for the upgraded computer was taxable.

Did the opinion apply if the computer was new or the work changed its use?

No. Counsel expressly limited the answer to the stated assumptions and said to submit the actual facts if they were wrong.

Citations and references

• California Revenue and Taxation Code section 6051 — retailer tax measured by gross receipts; complete text, definitions, sourcing, rates, exceptions, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6012 — no gross-receipts deduction for material, labor, service, or other expense; complete text, definitions, exclusions, allocations, amendments, later history, and current law not supplied
• Business Taxes Law Guide Annotation 315.0055 (Apr. 13, 1992) — underlying annotation and supporting opinion not reproduced; the live 315 collection supplies no exact-source link for it
• November 25, 1996 request — full request, identities, account record, computers, ownership, age, prior use, motherboards, memory, purposes, charges, invoices, collections, and transactions not reproduced
• January 21, 1997 Tax Counsel Charlotte Chyr letter, copied to the Culver City District Administrator — no reply, corrected facts, contract, invoice, work record, sale, tax return, refund, audit, assessment, appeal, or later outcome supplied
• Official Annotation 315.0124's used-computer, customer-ownership, upgrade, no-different-use, labor, parts, and date rules — annotation omits the request, example, authorities, resale scenario, invalidity warning, missing records, later outcome, and reliance status and supplies no additional record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/315-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/315-0124.pdf

Original ruling text

315.0124

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 323-3787
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
________

January 21, 1997

Ms. A--- C--T--XXXX --- Avenue
--- ---, CA XXXXX
Re:

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
________
E. L. SORENSEN, JR.
Executive Director

T---, Inc.
SR -- XX-XXXXXX

Dear Ms. C---:
This is in response to your letter dated November 25, 1996 regarding the applicability of tax to T---, Inc.’s (“T---”) labor charges connected with changing a motherboard or adding memory to a computer. You state: “We would like to determine whether we should not collect sales taxes on labor pertaining to computer upgrades. Up to now we have been collecting sales tax on labor when we upgrade a computer such as changing the motherboard from 486 to 586, or adding memory, etc....” California imposes a sales tax on retailers, measured by gross receipts, for retail sales of tangible personal property in this state. (Rev. & Tax. Code § 6051.) “Gross receipts” mean the total amount of the sale without any deduction on account of the cost of materials used, labor or service cost, or any other expense. (Rev. & Tax. Code § 6012.) We assume that T--- changes the motherboard of, or adds memory to, used computers that are owned by its customers. We further assume that the motherboard or additional memory merely upgrades the used computer by increasing its existing memory, and does not refit the computer for a use different from which it was originally produced. If such is the case, the charge for the motherboard or additional memory furnished to the customer is taxable. (BTLG Annot. 315.0055 (4/13/92).) Tax, however, does not apply to the charge for labor to install the motherboard or additional memory. (Id.) If T--- installs the motherboard or additional memory into a used computer, and then makes a retail sale of the upgraded computer, our conclusion would be different. The charge for labor to install the motherboard or additional memory is a cost incurred to prepare the computer for sale, and is therefore included in gross receipts. The charge for the motherboard or additional memory is also included in gross receipts as a cost of the materials used. Accordingly, the entire charge for the used computer is taxable.

Ms. A--- C---

-2-

January 21, 1997
315.0124

This opinion is based on the facts presented in your letter and the assumptions made above. If our assumptions are incorrect, this opinion does not apply. If such is the case and you wish an opinion applicable to the actual facts of the transaction, please write again and describe the transaction with specificity. Very truly yours,

Charlotte Chyr
Tax Counsel
CC:cl
cc:

Culver City District Administrator