How did California tax computer equipment bought by a parent for resale after configuration and testing at a California service center?

Plain-English summary

The parent bought computer hardware, software, and related equipment for resale to banking subsidiaries in five states. Everything first went to a California service center for unpacking, software loading, configuration, diagnostics, labeling, disassembly, repacking, and shipment to a designated branch. No banking transactions or data were processed during testing.

With no California office participating in the parent's sales, sales tax did not apply to those sales. The California subsidiary's purchase for California use was subject to use tax, and the parent, as a retailer engaged in business here, had to collect it.

The parent could purchase the hardware, software, and qualifying assembly labor for resale. Its use-tax registration number was not a seller's permit, so its resale certificate instead had to state that it made no California sales subject to sales tax.

Property shipped to the Nevada, Oregon, Washington, and Idaho subsidiaries for sole use outside California was not subject to California use tax.

The prospective ICAN project covered more than 400 branches. At the California center, the work included receiving inventory, unpacking, assembly, installing software on file servers and workstations, labeling, configuring, diagnostics, disassembly, repacking, and shipment. The equipment processed no banking transactions or data before branch installation.

The center would supply some equipment, while the parent would buy most items from other vendors. Counsel said the parent could issue resale certificates to those vendors and the center for hardware, software, and assembly labor, provided the stated no-California-sales assumptions held.

The sample certificate in absent Exhibit A used the parent's certificate-of-registration—use-tax number. Counsel said that number was not a seller's permit and did not itself authorize resale purchases; Regulation 1668(b) instead allowed a statement that the parent made no California sales subject to sales tax.

The letter is conditional and prospective. It supplies no completed rollout, branch allocation, contract, order, invoice, inventory or testing record, resale certificate, shipment, price, tax calculation, return, collection receipt, audit, assessment, claim, appeal, or later outcome. The listed Regulation 1620 and 1668 enclosures are not included.

The live annotation says the California service center was owned and operated by another party. The supporting request identifies the center's tasks and equipment role but does not state that ownership relationship, so this page does not import it as a contract fact.

Common questions

Why did the California testing not defeat resale treatment?

The stated center activity prepared and tested branch-specific packages without processing banking transactions or data. Counsel accepted the parent's planned purchases as for resale under those facts.

Which subsidiary purchase bore California use tax?

The California subsidiary's purchase for California use. Counsel said the parent was a retailer engaged in business here and had to collect that use tax and provide a receipt.

Why did sales tax not apply to the parent's affiliate sales?

Counsel assumed no California office, branch, outlet or other parent place of business participated in the sales. Under Regulation 1620(a)(2)(B), that kept the described sales outside California sales tax.

Could the parent use its use-tax registration number as a seller's permit?

No. Counsel said the SC account shown in Exhibit A was a certificate of registration—use tax, not a seller's permit. The resale certificate instead had to state that the parent made no California sales subject to sales tax.

What property escaped California use tax?

Property the parent shipped to its Nevada, Oregon, Washington, and Idaho subsidiaries for their use solely outside California, under the stated plan and assumptions.

Did the source show the ICAN project as completed?

No. It gives prospective advice and no actual purchases, branch shipments, certificates, returns, collections, assessments, claims, appeals, or later results.

Citations and references

• California Sales and Use Tax Regulation 1620(a)(2)(B) — cited for no sales tax absent participation by a California parent place; complete authority, every condition, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6203 and Regulation 1686 — cited for use-tax collection and receipt duties; complete authorities, nexus facts, rules, amendments, later history, and current law not supplied
• California Revenue and Taxation Code sections 6029 and 6093 and Regulation 1668(b) — cited for the distinction between use-tax registration and a seller's permit and the alternate resale-certificate statement; complete authorities, requirements, amendments, later history, and current law not supplied
• December 14 request, Exhibit A, ICAN project and center workflow — request and exhibit are absent, and no underlying transaction, test, certificate, shipment, price, tax, or outcome records are supplied
• February 24 response and listed Regulation 1620 and 1668 enclosures — enclosures are absent, and no completed rollout, audit, assessment, claim, appeal, or later outcome is supplied
• Official Annotation 325.0160's historical summary and date — adds a center ownership relationship not stated in the letter and omits the project scale, assumptions, certificate issue, 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/325-0160.pdf

Original ruling text

325.0160

STATE OF CALIFORNIA

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

February 24, 1994

Mr. [L]
Senior Corporate Tax Officer
[B]
XXX S.W. --- --P. O. Box XXXX
---, -- XXXXX-XXXX
Re:

S- -- XX-XXXXXX
Ruling Request

Dear Mr. [L]:
This is in reply to your December 14, 1993 letter regarding the application of California sales and use tax to charges for computer hardware and software under the following facts you provided: “[B] is the parent of an affiliated financial services group, which primarily provides banking related services in California, Nevada, Oregon, Washington and Idaho. [B] from time to time as part of its trade or business acquires personal property which it then resells to its various subsidiaries, including its [---] subsidiaries located in the aforementioned states: [B-CA], [B-NV], [B-OR],
[B-WA], and [B-ID].
“As part of a comprehensive plan to upgrade all existing branch computer technologies at more than 400 [---] branches operated by these five [---] subsidiaries, [B] and these [---] subsidiaries have undertaken a project entitled the Integrated Customer Access Network (ICAN) project. The project is structured such that [B] will first acquire all related computer hardware, software and related equipment from a third party vendor who will ship these items to the [ICS] Center in [---], California. On a branch-by-branch basis, [ICS] will unpack the hardware, load certain software and configure the package in the same arrangement that it will be used at specific [---] branches in order to test to ensure that the hardware and software will function property before they are shipped to the final

Mr. [L]

-2-

February 24, 1994
325.0160

destination subsidiary branch. Once tested, functioning equipment will be repacked by [ICS] and shipped from [---], California at the direction of [B] to a specific branch of either [B-CA], [B-NV], [B-OR], [B-WA] or [B-ID]. [B] will bill each shipment to the appropriate [---] subsidiary for shipments made to their branches. “[ICS] will provide some of the equipment to [B], but the majority of the items will be purchased from other vendors by [B]. Regardless of which vendor sells the equipment to [B], all such purchases by [U] will be for resale to affiliated [---] subsidiaries. “[ICS]’s specific tasks performed at the [ICS] Center with respect to the ICAN project will include (all for the purpose of testing): receiving the equipment and software into inventory for [B] unpacking, assembly, installation of software on file servers and computer workstations, application of inventory control labels, configuring various equipment, running diagnostics to ensure functionality, disassembly/disconnecting items from each other, repackaging each piece, and shipment to the final destination branch as determined by [B]. “The ICAN equipment will not be used to process any [---] transactions or data until shipped by [ICS] on behalf of [B] to one of the final destination branches where the previously tested equipment will be installed.” We assume that there is no participation in the transaction in any way by any local office, branch, outlet, or other place of business in this state of [B]. The sales tax is imposed upon on all retailers at the applicable rate of the gross receipts from the sale of tangible personal property sold at retail in this state. If there is no participation in the sale by any place of business of [B] in this state, the sale is not subject to sales tax. See Sales and Use Tax Regulation 1620, Interstate and Foreign Commerce, Subdivision (a)(2)(B). The California use tax is imposed upon 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. When [B-CA] purchases the computer hardware and software from
[B] for use in this state, the use is subject to use tax. As a retailer engaged in business in this state, [B] is responsible for collecting the use tax from [B-CA] and providing it with a receipt as provided in Sales and Use Tax Regulation 1686, Receipts For Tax Paid to Retailers. (Rev. & Tax Code § 6203.) We assume that [B] makes no sales of tangible personal property in California subject to sales tax; that is, [B] has no place of business in this state which participates in sales of tangible personal property by [B] such that [B] would be required to hold a seller’s permit. In such case,

Mr. [L]

-3-

February 24, 1994
325.0160

[B] may issue resale certificates to the hardware vendor and to [ICS] to purchase the respective hardware, software, and assembly labor ex-tax. However, the example of the resale certificate you provided as Exhibit A shows an account number issued by this Board, SC -- XX-XXXXXX. That account number is for a certificate of registration-use tax, rather than a seller’s permit, and does not allow [B] to purchase tangible personal property under a resale certificate. See Revenue and Taxation Code sections 6029 and 6093. Therefore, in accordance with Sales and Use Tax Regulation 1668, subdivision (b) in lieu of a seller’s permit number, [B] should note on the resale certificate that it makes no sales subject to sales tax in this state. We confirm your understanding that use tax does not apply to charges for the tangible personal property which [B] has shipped out of state to [B-NV], [B-OR], [B-WA], and [B-ID] for their use of the property solely outside of this state. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:plh
Enclosures - Regulation 1620 and 1668