Was use tax measured by the full multi-site software license price when tapes were delivered, installed, tested, and copied at California headquarters?

Plain-English summary

The agreement licensed clinical medical software for ten laboratory sites at one total price of $2.5 million. Tapes were shipped to the customer's California headquarters, where employees created the computing environment, installed and tested the software, formatted the database, and made copies for other sites. The headquarters itself remained a licensed site.

Those California activities were use of tangible personal property under the historical rules. Because the license was not priced by individual site and California copying supported the ten-site deployment, use tax applied to the entire $2.5 million sales price rather than only a California-site portion.

The out-of-state developer was treated as a retailer engaged in business in California and had to collect the use tax and give the customer the required receipt.

The tapes arrived before the June 29, 1990 agreement: shipments occurred June 20 and July 6 because of the short installation schedule. California employees created a VMS environment, installed and tested the first release of a new version, worked on system documentation and database formatting, and made the copies used for the multisite rollout.

In August 1990 a software-and-database copy went from California to the first Texas site. California personnel traveled there for installation, with developer assistance as needed. The California headquarters remained a licensed site, and the customer could move a license from a closed site to another; the request described one such 1993 substitution.

The first invoice did not issue until November 1990. It billed a $400,000 first installment and charged California sales tax. The opinion nonetheless concludes that use tax applied to the full $2.5 million and supplies no return, payment, credit, refund, reclassification, assessment, or later outcome explaining how the invoiced sales tax was handled.

Counsel assumed the developer shipped the tapes from outside California. The fact that the customer actually made copies here came from an unreproduced telephone conversation because the letters were unclear. The agreement, tapes, shipping records, software, copies, site records, invoices, payments, returns, receipt, and later proceeding are absent.

Common questions

Why did staff treat the software as used in California?

The customer installed it on a California computer, tested it, performed documentation and database work, made copies here for other sites, and retained the California headquarters as a licensed site.

Why was the measure the full $2.5 million?

The agreement gave one ten-site license at a single total price rather than a price for each site. California copying supported deployment to the other sites, and staff applied use tax to the full sales price under those circumstances.

Did the tapes arrive before the contract?

Yes. The request said tapes shipped June 20 and July 6, 1990, while the agreement was signed June 29, because the ten-site installation schedule was short.

What happened at the Texas site?

In August 1990 a copy of the software and database moved from California to Texas. California personnel installed it and completed the database there, with the developer assisting as necessary.

Why does the source mention both sales tax and use tax?

The first $400,000 installment invoice charged California sales tax, but counsel concluded the applicable tax was use tax on the total price and that the developer had to collect it. The source gives no filing, credit, refund, or correction record resolving the invoice treatment.

Was actual California copying documented in the letter?

The written submissions were unclear. Counsel says an unreproduced telephone conversation established that the customer actually made the copies in California rather than receiving copies from the developer's outside-state location.

Citations and references

• California Revenue and Taxation Code section 6201 — cited for California use tax on tangible personal property; complete authority, definitions, measure, exceptions, amendments, later history, and current software law not supplied
• California Revenue and Taxation Code section 6203 — cited for retailer-engaged-in-business status and collection duty; complete authority, nexus evidence, collection rules, amendments, later history, and current law not supplied
• California Sales and Use Tax Regulation 1686 — cited for the tax-paid receipt; complete authority, contents, timing, amendments, later history, and current law not supplied
• June 29 license and 1990–1993 delivery, installation, copying, invoicing and site history — described but no underlying agreement, media, shipment, performance, invoice, payment, return, receipt, or site record is supplied
• March 15 request, telephone conversation and March 29 response — no assessment, collection, credit, refund, claim, appeal, or later outcome supplied
• Official Annotation 325.0130's historical summary and date — omits the shipment assumption, telephone-source gap, sales-tax invoice, transfer details, missing records, applied outcome, and reliance status

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/325-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0130.pdf

Original ruling text

325.0130

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

March 29, 1994
SENT BY FAX & REGULAR MAIL
Re:
This is in reply to your March 15, 1994 letter regarding the application of sales or use tax to a charge by --- for software delivered to a customer in California. You provided the following facts:
--- (hereinafter ---headquarters in --- develops and sells clinical medical
software. --- (hereinafter --- headquartered in --- California, is the owner
of multiple clinical laboratories located throughout the country.
"On June 29, 1990, --- entered into a computer license agreement with --whereby --- acquired the right to use certain computer software at ten of its clinical reference laboratory sites. The sales agreement tentatively identified eight of the ten sites. However, --- retained the right to substitute equivalent size facilities for any site. The agreement also tentatively identified --- (hereinafter --- a Texas laboratory, as being the first laboratory site to be installed. The sales agreement permits --- to make copies of the software to fulfill the ten site requirement, eliminating the need for --- ship more than one copy of the tape containing the software. "The agreement did not specify a purchase price for each site. The agreement merely lists all of the software licensed for the ten sites and indicates a total price of $2,500,000. Terms for the payment of the purchase price link payment to the earlier of the conversion of various sites or specified dates. Full payment was due by December 15, 1992, or after the conversion of the seventh site. "On June 20 and July 6 of 1990, --- shipped tapes containing the licensed software to --- at ---headquarters. The software was shipped prior to the contract signing due to the short time frame contemplated for the ten-site installation.
--- employees created an appropriate VMS environment on computer
hardware located at the California headquarters and installed the licensed
software. Since the software was the first release of a new version, --employees tested the software to insure that it was functioning correctly. Work related to documentation of the system and formatting the database was also performed in California.

"In August 1990, a copy of the software and database was transferred to
the Texas site where it was installed and the database completed. --personnel were responsible for the installation of the software and traveled from California to Texas to perform the installation. --- provided assistance in the installation process where necessary. "Although the software media was delivered in June and July of 1990, the first invoice was not issued until November 1990. When the site became operational, --- invoiced --- $400,000 for the first installment based on the agreement, charging California sales tax on the invoice. "It should be noted that the --- headquarters was a licensed site and that the software has remained installed at that location since the date of the original installation in July 1990. "It should further be noted that the license agreement is for ten sites of ---choosing at anyone time and is not site-specific. --- has the right to transfer software from an existing site to a new site at its discretion. In fact, the --site was closed in 1993 and another laboratory site substituted.” We assume that --- shipped the software to --- from outside this state. 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 section 6201.) Under the facts you present, -- purchased tangible personal property from a retailer for use in this state. When --installed the software in its computer in California, it made a use of the software in this state. Although it is not clear from your letters, I understand from our telephone conversation that, not only did the sales agreement permit --- to make the copy of the software in this state, --- did, in fact, make the copies in this state, rather than --- shipping copies to other sites from its out-of-state location. Under these circumstances, California use tax applied to --- use of the software in this state measured by the total sales price of
$2,500,000. As a retailer engaged in business in this state pursuant to Revenue and Taxation Code section 6203, --- was required to collect the use tax from --- and provide -- a receipt as provided in Sales and Use Tax Regulation 1686, Receipts for Tax Paid to Retailers. Very truly yours, Ronald L. Dick Staff Counsel RLD:plh bc: Santa Ana District Administrator - EA Out-of-State District Administrator - OH