Did an out-of-state seller's California software license create a taxable lease and use-tax collection duty when the software had to be returned?

Plain-English summary

K---'s non-taxpayer editor posed two otherwise identical canned-software hypotheticals after Quill: an out-of-state company with no California office/personnel solicited by mail/telephone, either sold a copy or granted a perpetual license retaining title and allowing any noninfringing use. Counsel labeled the response general comments, not section 6596 reliance advice.

For sales, counsel additionally assumed no California training/maintenance contract and that storage media sat outside California at sale. No California sales tax applied; under the letter's 1993 Quill reading, mail delivery alone created no seller collection duty at this time. Purchaser use tax was separately described and not erased.

For the license, counsel added that customer must return software at the license's end, without reconciling that with perpetual. That assumption made a temporary lease under section 6006.3. K--- presumably copied the program onto sent media, so it was not same-form acquired; Regulation 1660 put use tax on rent.

Section 6203(c) made California-property rent sufficient business presence for collection on that leased property. Quoted Annotation 220.0140 limited that connection to in-state leased property, not separate interstate sales. The letter used Quill's few floppy diskettes footnote to contrast mail sales, while treating the lessor's continuing California sale as physical-presence nexus.

No actual license/sale, software/media, invoice, return, delivery/location, training/maintenance, fee, use or tax evidence is supplied. Live 330.2320 publishes only the assumed-return lease/collection result.

Common questions

Did the word license prevent lease treatment?

No. Under the return-of-software assumption, the temporary transfer of possession while retaining title was a lease.

Did the original hypothetical require a return?

No. It called the license perpetual; counsel added a return-at-end assumption without reconciliation.

Why did the tax-paid-lease exception not apply?

The opinion assumed the licensor copied the program onto the storage media sent to the customer, so it did not lease the property in substantially the same form as acquired.

What created the California collection duty for the lease?

The leased software was physically located in California, and section 6203(c) treated a retailer deriving rent from property in the state as engaged in business here.

Did mail-sale noncollection eliminate buyer use tax?

No. The letter separately described purchaser use tax; its Quill branch addressed seller collection duty.

Can the letter's 1993 mail-order nexus discussion be used today?

This source only states the 1993 analysis. Current nexus and collection law must be checked separately.

Was this taxpayer-specific written advice?

No. The editor was not the taxpayer and supplied hypotheticals, so the letter expressly denied section 6596 status.

Citations and references

• Section 6596 — hypothetical/non-taxpayer advice denied reliance status
• Sections 6051/6010.5/6017/6201/6303; Bank of America — sales/use/location/collection
• Quill, incompletely printed — historical mail/common-carrier and floppy-disk nexus
• Regulation 1502(f) — canned software/media and all license fees
• Sections 6203(b)/(c); section 6006.3; Regulation 1660 — local activity and lease collection
• Annotation 220.0140 — quoted lease-nexus limit; source/history absent
• May 19 request, transaction/software/activity/tax records and regulation enclosures — absent
• July 8, 1993 Waid letter — added assumptions and hypothetical nonreliance analysis
• Official Annotation 330.2320 — lease branch without sale/reliance/source limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2320
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2320.pdf

Original ruling text

330.2320

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District, Kentfield

450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE (916) 324-3828

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR
Third District, San Diego

July 8, 1993

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. S--- S--Associate Editor
K--- Publications
XXX --- Avenue
P.O. Box XXX
---, --- XXXXX-XXX
Re: [No Permit Number]
Taxation of Computer Software
Dear Mr. S--I am responding to your letter to Assistant Chief Counsel Gary J. Jugum dated May 19, 1993. You ask about the taxation of computer software in the following situation in the wake of the decision in Quill v. North Dakota (1992) 504 U.S. ---, 119 L.Ed.2d 91, 112 S.Ct. ---. "Suppose we are an out-of-state company that has no contacts with California. We have no office nor personnel in the state. All of our sales are conducted via mail and telephone solicitations. Next, suppose we conduct two transactions, both involving canned, or off-the-shelf, software. The first transaction is a pure sale: we sell you a copy of the software. The second transaction is a perpetual license agreement where title to the software remains with us but you can use your copy in any way you desire that does not violate any copyright or patent laws. All other aspects of the contract are identical." Since you are not the taxpayer and are only posing hypothetical facts, this letter does not constitute specific written advice to the taxpayer under Revenue and Taxation Code Section 6596. Rather, it constitutes general comments regarding the applicability of California Sales and Use Tax Law to a set of hypothetical facts.

Mr. S--- S---

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July 8, 1993
330.2320

OPINION
A. Use Tax on Tangible Personal Property
In California, except where specifically exempted by statute, Revenue and Taxation Code Section 6051 imposes an excise tax, computed as a percentage of gross receipts, upon all retailers for the privilege of selling tangible personal property at retail in this state. (Unless otherwise stated, all statutory references are to the Revenue and Taxation Code.) Property is "in this state" if it is physically located within the external limits of California when the sale takes place. (§§ 6010.5, 6017.) Likewise, Section 6201 imposes a use tax in the storage, use, or other consumption in this state of tangible personal property purchased from any retailer for use, storage, or other consumption in this state unless otherwise exempted from taxation by statute. Please note that the sales tax is imposed upon the retailer for the privilege of selling tangible personal property in this state while the use tax is upon the purchaser who uses, stores, or otherwise consumes such property here. The retailer must collect the use tax from the purchaser if engaged in business in this state. (Bank of America v. St. Bd. of Equalization (1962) 209 Cal.App.2d 780, 792, 792-793 [26 Cal.Rptr. 348].) (§ 6303.) Under the Quill decision, a state may not require a mail-order retailer whose only contact with the state is by mail or through common carrier to collect state use tax from the buyer without the approval of Congress. B. Taxation of Sales of Computer Software. Regulation 1502(f) discusses the taxation of sales or leases of canned software in pertinent part as follows: (1) PREWRITTEN (CANNED) PROGRAMS....

(B) Tax applies to the entire amount charged to the customer. Where the consideration consists of license fees, all license fees, including site licensing and other end users fees, are includible in the measure of tax.... Tax applies to the sale or lease of the storage media or coding sheets on which or into which prewritten (canned) software programs have been recorded, coded, or punched.

Mr. S--- S---

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July 8, 1993
330.2320

C. Tax Consequences to K--- Publications.
Under your hypothetical situation, K--- has no offices or sales personnel in California. We assume it also does not contract with persons here either to train its customers in the use of the program or to maintain it. (See, § 6203(b).) In this case, its only contact with California is through the mail. As to transactions where the software is sold outright, the tangible personal property i.e., the storage media, is presumably located at K---' place of business when the sale is made. Since the property is located out of state at that time, sales tax does not apply. Under the facts you relate, K--- has no contact with California other than mailing the software to the customer. Under Quill, then, K--- has no obligation to collect California use tax from the purchaser at this time. The license agreement is different. We assume that at the end of the license, the customer must return the software to K---. Thus, we consider that K--- would be leasing the software to the customers. (§ 6006.3.) A lease of tangible personal property is a continuing sale and purchase unless the property is leased in substantially the same form as acquired by the lessor and sales tax reimbursement or use tax measured by the sales price. Since K--presumably copies the program onto the storage media sent out with the license, it does not lease it in the same form as acquired. As a result, the license is subject to use tax measured by the rental payments. (Reg. 1660.) Any retailer deriving rentals from a lease of tangible personal property in this state is engaged in business here and so required to collect use tax. (§ 6203(c).) The policy behind Section 6203(c) is explained in Annotation 220.0140 as follows: "The purpose of the addition of subsection (c) to Section 6203 was to require the collection of the use tax by an out-of-state lessor on leases of tangible personal property in this state where the lessor did not otherwise qualify as "engaged in business in this state" under Section 6203(a) or (b). Where the lessor's connection with this state is solely that of leasing tangible personal property, he is responsible for collection of the use tax only with respect to leased property physically located in this state. The mere presence of the leased property in this state does not constitute the requisite nexus with respect to sales in interstate commerce, made by the out-of-state lessor to California customers." (Sales and Use Tax Annotations are excerpts from staff opinion letters and serve as a guide to staff policy.) The passage from Quill you quoted reinforces this principle. The Court noted there that Quill licensed software to some of its North Dakota clients, apparently so that those clients could more readily order Quill's products. As you note, the Court held that "'the existence in North Dakota of a few floppy diskettes to which Quill holds title seems a slender thread on which to base nexus.'" (Quill, supra., 119 L.Ed.2d at 108, fn. 8.) Thus, as noted in the annotation, the

Mr. S--- S---

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July 8, 1993
330.2320

retailer does not have nexus with regard to its mail-order sales. Leases are different. A lessor's business is the continuing sale and purchase of leased property in California; the physical presence of property in this state gives the required "nexus" for California to impose a duty to collect use tax. For your information, I have included a copy of Regulations 1502 and 1660. I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again. Sincerely,

John L. Waid
Tax Counsel

JLW:es
Encs.: Regs. 1502 & 1660