How did California tax master computer tapes delivered to a buyer in Oregon, duplicated there, and returned as copies for California use?

Plain-English summary

A seller submitted a May 25, 1993 request about a “very complicated” technology-asset transaction and received a June 4 sales-tax opinion. A representative's July 13 letter proposed four changes because the original transaction structure created cost, delay or newly discovered asset issues. None of those records or the asset-purchase agreement and schedules is reproduced.

For personal computers, the original plan electronically transferred all information to buyer media. The change transferred only proprietary information, largely source code, that way. Canned programs such as WordPerfect and Lotus, electronic letters and memoranda, and the seller's uncopyable ISIS object code would remain on the PCs. Hardware pricing would include that information: canned programs at seller license cost, ISIS at comparable site-license fees and documents at a de minimis amount. The letter taxed the PCs at the fair value allocated in the agreement schedule, including programs left on them.

Database inventory on magnetic tapes and floppy disks originally was to be destroyed. To avoid customer-order delay, the change allowed the buyer only to sell those materials to customers or destroy them, with no other use. The letter treated that inventory as purchased for resale and imposed no sales or use tax.

Master source-code tapes also originally were to be destroyed and recreated in California. Instead, the seller would ship them to the buyer in Oregon on the Monday after weekend technology transfers and retain title until Oregon receipt. The buyer would duplicate them there, return the new copies to California and eventually destroy the originals in Oregon. No sales or use tax applied to the Oregon transfer of originals. Copies returned to California without intervening use elsewhere bore use tax on the blank-tape cost plus duplication charges.

After the June opinion, the parties discovered magnetic tapes held in escrow for major customers to receive if the seller entered bankruptcy. The proposed contract left title with the seller, shifted the update-tape duty to the buyer and instructed the escrow agent to destroy old tapes after replacements arrived. The letter imposed no sales or use tax while seller title remained.

The earlier opinion otherwise remained valid, but its contents are absent. Neither request covered automobiles, other vehicles, leasehold improvements, supplies, packaging and wrapping materials, circuits or mask works; the letter warned tax might apply if they transferred. Because steps were to begin immediately, the agency sent a fax and mailed the original on July 16. No executed transfer, price, invoice, return, audit or later outcome is supplied.

The live annotation covers only the master-tape result and describes the buyer as a California resident, a fact not stated in the supporting PDF. It omits the prior-opinion provenance, proposed timing and agreement, no-intervening-use condition, computer, database and escrow rulings, excluded assets, missing evidence and unapplied posture.

Common questions

Why were the personal computers taxable?

They transferred with programs and other information still on them. The stated tax measure was the scheduled fair value, including allocated program value.

Why was the database inventory treated as resale property?

The proposed contract limited the buyer to customer sales or destruction and prohibited other use.

When did title to the original master tapes transfer?

On buyer receipt in Oregon under the proposed change.

How were the California-returned copies measured for use tax?

By the blank magnetic-tape cost plus duplication charges, when returned without intervening use elsewhere.

Why were the escrowed tapes not taxed?

The seller retained title; the buyer assumed only the duty to submit updated tapes, after which the escrow agent would destroy the old ones.

Did the opinion cover every transferred asset?

No. It expressly left automobiles, other vehicles, leasehold improvements, supplies, packaging and wrapping materials, circuits and mask works undecided.

Were the proposed changes completed?

The source does not say. It supplies no executed agreement, schedule, asset record, shipment, duplication, transfer, payment, filing, audit or later outcome.

Citations and references

• May 25 request, June 4 opinion and July 13 proposal — described but absent, along with the asset-purchase agreement and Schedule 2.2
• July 16 computer ruling — tax on scheduled fair value including remaining programs; valuations and transfer records absent
• July 16 inventory and escrow rulings — resale restriction and seller-retained title; underlying inventory, customer and escrow records absent
• July 16 master-tape ruling — Oregon originals exempt; California-returned copies taxed on tape and duplication cost without intervening use; proof absent
• Excluded asset categories — seven groups left undecided with possible tax; no transfer record supplied
• Official Annotation 325.0571.870 — adds buyer residency and publishes only the master-tape result, omitting the broader transaction and evidentiary limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 325.0571.870
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/325-0571-870.pdf

Original ruling text

325.0571.870

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-3723

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

July 16, 1993

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. R--- D. U--B---, P--- & H----- --- Plaza --- --- Tower
--- ---, CA XXXXX
Re:

M--- D--- L--Sales Tax Opinion
Account No. SR -- XX-XXXXXX

Dear Mr. U---:
This is in response to your letter of July 13, 1993.
M--- D--- L--- (the "Seller") submitted on May 25, 1993 a request for opinion in regard to a very complicated fact pattern. We rendered our opinion on June 4, 1993. We understand that the Seller believes that it is necessary to make certain changes to the transaction described in the original request. A.

Personal Computers.

In the original request, you anticipated transferring all information contained on the Seller's personal computers to the Buyer's storage media electronically. See paragraph 2(g) on old Schedule 2.2. This transfer will be far more time-consuming and expensive than initially believed. As an alternative, you will transfer only proprietary information (largely source code materials) electronically. Items such as canned programs (WordPerfect, Lotus, etc.), and electronic copies of letters, memos and other documents will not be transferred electronically. In addition, the Seller has one of its products (ISIS) residing on a number of PC's, although the PC's contain only the object code version, which cannot be copied to produce a master. This programming will not be transferred electronically as well.

Mr. R--- D. U---

-2-

July 16, 1993
325.0571.870

You will make a corresponding pricing adjustment in the contract to reflect the change in the materials transferred electronically pursuant to paragraph 2(g) of old Schedule 2.2. Specifically, the contract price for the transfer of the PC hardware will reflect the value of the information left on the PC's. The price for the WordPerfect, Lotus and other programs will be based upon the Seller's cost of acquiring the licenses to use the canned programs from the licensors. The price for the ISIS object code materials will be based upon the site licensing fees charged by the Seller to a licensee for a similar number of users. A de minimis price will be attributed to the electronic copies of letters, memos and documents. B.

Inventory.

In the original request, you anticipated destroying the inventory of magnetic tapes and floppy disks containing database materials. See paragraph 2(p) of old Schedule 2.2. It appears now that the destruction of inventory could make it difficult or impossible to fill a customer's order in a timely manner. As an alternative, you will keep those materials in inventory, and change the contract to provide that the Buyer can only sell those materials to customers or destroy them. The Buyer will not be permitted to make any other use of the materials. C.

Master Tapes.

In the original request, you anticipated destroying all master magnetic tapes containing source code. See paragraph 2(p) of old Schedule 2.2. You anticipated that the Buyer would produce new master tapes at the California facility. See paragraph 2(q) of old Schedule 2.2. It appears now that the Buyer would be unable to fill customer orders for a period of time if the master tapes are destroyed and then reproduced as envisioned under paragraphs 2(p) and (q) of old Schedule 2.2. As an alternative, the Seller will ship the master tapes to the Buyer in Oregon, where the Buyer will have the tapes duplicated. The Buyer will return the new duplicates to California. The originals will stay in Oregon and eventually be destroyed there. The technology transfers contemplated by the parties and addressed in Schedule 2.2 will occur during a weekend. The Seller will ship the master tapes to Oregon on the Monday following the weekend when the technology transfers occur. The Seller will retain title to the master tapes until the Buyer receives the tapes in Oregon.

Mr. R--- D. U---

D.

-3-

July 16, 1993
325.0571.870

Escrowed Tapes.

After you received our sales tax opinion, you discovered that the Seller has placed certain magnetic tapes in escrow for the benefit of certain major customers. The customers receive the tapes if the Seller goes into bankruptcy. You intend to modify the contract to provide that the Seller retains title to the tapes in escrow, and that the Buyer assumes the Seller's obligation to submit new tapes containing updated programs. The escrow agent will be instructed to destroy the old tapes after the updated tapes are received. E.

Modification of Earlier Opinion.
The opinions expressed in my Sales Tax Opinion letter dated June 4, 1993 remain valid, except that: (i)

Sales Tax will apply to the transfer to the Buyer of the
personal computers, with the measure of the tax being the
fair value allocated to these items by the parties as reflected in a schedule attached to the Asset Purchase Agreement (including the price allocated to any programs remaining on the personal computers when they are transferred);

(ii)

No sales or use tax will apply to the transfer of the
inventory of magnetic tapes or floppy disks containing
databases, as these items will be sold for resale;

(iii)

No sales or use tax will apply to the transfer of the master magnetic tapes by the Seller to the Buyer in Oregon; use tax will apply to the copies of the tapes that are returned to California without an intervening use elsewhere, with the measure of the use tax being the purchase price of the magnetic tapes which includes the cost of the tapes as well as duplication charges; and,

(iv)

No sales or use tax applies to the tapes in escrow, with the Seller retaining title.

As in your earlier ruling request, you did not request our opinion regarding the possible sales tax treatment relating to the transfer or the possible transfer of automobiles, other vehicles, leasehold improvements, supplies, packaging and wrapping materials, and circuits and mask works. Sales or use tax may apply if the Seller transfers any of these items to the Buyer.

Mr. R--- D. U---

-4-

July 16, 1993
325.0571.870

We understand that time is of the essence because the parties intend to take certain steps to begin the transfers described above immediately. Accordingly, we are providing you with a facsimile transmission of this letter, and we are mailing the original today. Sincerely,

Gary J. Jugum
Assistant Chief Counsel

GJJ:sr