Were rentals taxable when a company bought database diskettes tax-paid and licensed the same disks for a fixed term with mandatory return?

Plain-English summary

Company X produced floppy disks containing database information supplied by Company Y. Company Y said it bought the disks tax-paid and licensed them to customers in substantially the same form.

The described agreement said Company Y retained all rights, title and interest in the information, required a disk's return if the customer did not renew and gave no purchase option. The request itself did not state a fixed term or unequivocally require return at every term end; counsel expressly added those assumptions.

Regulation 1660(c)(2) excluded tax on rent for tangible personal property leased in substantially the same form after the lessor/transferor paid tax measured by purchase price. If acquisition tax had not been paid, the cost election/use tax had to be reported and paid with the timely return for the period the property first entered rental service.

On the assumed fixed-term, mandatory-return facts, counsel treated Company Y as leasing the physical disks. If it paid sales-tax reimbursement when buying them or timely reported/paid purchase-price use tax, no use tax applied to customer rent.

The PDF provides no agreement, invoices, disks, acquisition-tax records, returns or implemented outcome. The live annotation repeats the conclusion and says (Am. 2003-1), but does not supply what was amended or the amendment's source.

Common questions

Did calling the arrangement a license prevent lease treatment?

No. The fixed term and required return supported lease treatment.

Were the rental charges taxable?

No, if acquisition tax and same-form requirements were met.

When was a cost election due if vendor tax was not paid?

With the timely return for the period when the disks first entered rental service.

Were fixed term and return fully established by the request?

No. Counsel explicitly assumed a fixed term and mandatory return at its end.

Did the opinion address electronic-only database access?

No. It concerned physical floppy disks.

What did the 2003 amendment change?

The live annotation says (Am. 2003-1) but supplies no amendment text or history, so this page does not infer the change.

Are the agreement and tax records available here?

No. The source quotes part of the described agreement but does not reproduce it, invoices, acquisition-tax proof, returns or a completed outcome.

Citations and references

• Regulation 1660(c)(2) — same-form property, acquisition tax and timely cost-election rule
• Sections 6452 and 6455 — return periods incorporated by Regulation 1660
• October 31, 1994 request and license agreement — partly quoted/described but absent
• February 23, 1995 counsel letter — fixed-term/mandatory-return assumptions and conditional rent result
• Official Annotation 330.2156 — marked (Am. 2003-1) without amendment text/history
• Disk/information-rights, invoice, acquisition-tax, return, filing and outcome records — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2156
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2156.pdf

Original ruling text

330.2156

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego

Telephone No.: (916) 445--6450
Fax No: (916) 323-3387

BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

February 23, 1995

Ms. J--- L. P--Senior Manager
--- --- --XXX --- --- ----- ---, CA XXXXX
Dear Ms. P---:
This is in reply to your October 31, 1994 letter regarding the application of sales and use tax to the following transaction you describe: “Company X produces floppy disks that contain ‘database information’ supplied by Company Y. Company Y purchases these diskettes tax paid and subsequently licenses them to customers in substantially the same form as acquired from Company X. The license agreement provides that Company Y owns all rights, title, and interest in the database information contained on the diskettes. The agreement further provides that the diskette must be returned to Company Y if the customer chooses not to renew the license agreement. The license agreement does not provide the customer with an option to purchase the diskette.” Given this information, you conclude the transfer of diskettes by Company Y to its customers is a lease and not subject to tax. In this regard, Sales and Use Tax Regulation 1660 provides at subdivision (c)(2):

Ms. J---t L. P---

-2-

February 23, 1995
330.2156

“PROPERTY LEASED IN FORM ACQUIRED. No sales or use tax is due with respect to the rentals charged for tangible personal property leased in substantially the same form as acquired by the lessor, or by his or her transferor, as to which the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price. If such tax has not been so paid, and the lessor desires to pay tax measured by the purchase price, it must be reported and paid timely with the return of the lessor for the period during which the property is first placed in rental service. A timely return is a return filed within the time prescribed by Section 6452 or 6455 of the Revenue and Taxation Code, whichever is applicable.” We assume the transfer of diskettes by Company Y to its customers is for a fixed term and the customers are required to return the disks at the end of that term. If Company Y purchases the diskettes containing the database information from Company X and either pays sales tax reimbursement or timely reports and pays use tax on the transaction, and leases the diskettes to Company Y’s customers in substantiallty the same form as it acquires the diskettes, no use tax is due with respect to the rentals Company Y charges its customers. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Staff Counsel
RLD:sr