Were monthly license fees for standardized commercial real-estate data delivered on disks and CD-ROMs taxable?

Plain-English summary

A Maryland-addressed provider's unreproduced September 5, 1996 letter described monthly licenses for commercial real-estate information. Researchers allegedly updated a regional database daily. Data went on computer disks and multimedia/building images on CDs. The letter said data became obsolete without updated disks, while CD images did not; nonreturn of CDs breached contract, and disks/CDs were not sold.

Counsel treated request as asking whether disk/CD charges were taxable. No license, database, query, research record, medium, customer, fee/invoice, update, return or tax record appears.

Regulation 1501's true-object test distinguishes property from service. Information specifically created, collected or compiled to one customer's order could be nontaxable service when a single disk/paper copy merely transmitted it; service provider paid tax on its materials.

Noncustom information—including a previously custom report—or preexisting-database output on tangible media was property. Indicators included established item price, generic statewide/county product, medium requiring mass production and preexisting database.

Counsel understood provider served numerous customers with noncustom disks/CDs at standardized price and recorded data itself rather than buying third-party prerecorded media. On those premises, customers sought media for its information, not custom service. Temporary transfers were leases, not same form as blank media, so provider had to collect/remit tax on rents.

The general lease paragraph visibly says continuing-sale treatment arises when neither or both conditions are not satisfied, a source double negative. The specific conclusion clearly finds both not-same-form and taxable rent, so this page preserves the text without rewriting its general formula.

The identified Regulation 1501 enclosure is not reproduced. Live Annotation 330.3011.200 publishes database/daily update, temporary disks/CDs, noncustom/preexisting data, many customers, standard price, true-object and rent-tax result. It omits data-versus-image claims, return-breach term, blank-media assumption, full custom/noncustom indicators, double negative, absent enclosure/evidence and later outcome.

No request, license, database or regional dataset, researcher work, customer order/query, custom/noncustom product sample, disk/CD, data/photo/update, standard-price schedule, monthly invoice/tax, transfer/return, breach, purchase/recording of media, Regulation 1501 enclosure, return, audit, assessment, claim, appeal or later outcome appears.

What this means for you

Document what was created for each customer versus drawn from existing data, product standardization, media acquisition/recording, number of copies/customers, price basis and return duties. A license label and informational value did not displace the tangible-media lease here.

Common questions

Did license avoid tax?

No. The actual object and delivery method controlled.

When could disk information be incidental?

When it was specifically created or compiled for a particular customer's order and a single copy merely transmitted that custom work.

Why was this database not custom?

It was generic, standardized, offered to many customers, and generated from a preexisting database.

Why was rent taxed instead of blank-media cost?

The provider recorded the data itself, so the leased product was not in substantially the same form as the media it acquired.

Did the source publish the license or customer orders?

No.

Is Regulation 1501 enclosed?

No.

Does live annotation include every assumption?

No. It omits blank-media, return and evidence limits.

Citations and references

• Sections 6051, 6011-6012; Civil Code 1656.1; Regulation 1700(a) — retail measure/reimbursement
• Sections 6201, 6401 — California use tax
• Regulation 1501 — true object/custom information; enclosure absent
• Sections 6006(g)(5), 6006.1, 6010(e)(5), 6010.1; Regulation 1660 — lease method
• Sections 6202-6204 — lessee/lessor duties
• Request and all database/license/media/customer/price/return/tax/outcome evidence — absent
• Live Annotation 330.3011.200 — conclusion without all assumptions

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.3011.200
• Original supporting opinion: 330.3011.200 PDF

Original ruling text

330.3011.200

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

October 8, 1996

KATHLEEN CONNELL
Controller, Sacramento

E. L. SORENSEN, JR
Executive Director

Ms. D--- P--R--- I--- G---, L.P.
XXXX --- Highway, Suite XXX
---, Maryland XXXXX
Re:

Account No. SS --- XX-XXXXXX

Dear Ms. P---:
This is in response to your letter dated September 5, 1996 regarding the application of tax on your company’s operations. You state: “R--- I--- G---, L.P. [(hereafter “RIG”)] is in the business of providing commercial real estate information to our customers through a license agreement. Our sales are based on monthly fees charged for this license agreement. Our database is updated daily by our team of researchers. The information provided is in the form of data and multi-media which are placed on disks and CDs, respectively. The date portion of the information becomes obsolete unless our customers receive updated data disks. On the other hand, the multi-media information on the CDs does not become obsolete as it includes actual pictures of commercial buildings. Pursuant to our license agreement, the customer is in breech of contract if the CDs are not returned…. We do not sell the disk or CD….” We understand your letter to ask whether tax applies on the amounts RIG charges its customers for its disks and CD ROMs. California imposes a sales tax on a retailer’s gross receipts from the retail sale of tangible personal property in this state unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) 1 When the sales tax does not apply, use tax is imposed on the sales price of property purchased from a retailer for storage, use or other consumption of that property in 1

This tax is imposed on the retailer who may collect reimbursement from its customer if the contract of sale so provides. (Civ. Code § 1656.1; Reg. 1700(a).)

Ms. D--- P---

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October 8, 1996
330.3011.200

California. (Rev. & Tax. Code §§ 6201, 6401.) 2 Taxable gross receipts or sales price generally include all amounts received with respect to the sale, with no deduction for the cost of materials, service, or expense of the retailer passed on to the purchaser, unless there is a specific statutory exclusion. (Rev. & Tax. Code §§ 6011, 6012.) Gross receipts or sales price do not include amounts from the sale of a service provided the service is not part of the sale of tangible personal property. (See Reg. 1501; copy enclosed.) The distinction between the sale of tangible personal property and the transfer of such property incidental to the providing of a service is set forth in Regulation 1501: “The basic distinction in determining whether a particular transaction involves a sale of tangible personal property or the transfer of tangible personal property incidental to the performance of a service is one of the true object of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service. A lease of tangible personal property in California is a continuing sale and purchase unless the lessor leases it in substantially the same form as acquired and has made a timely election to pay California sales tax reimbursement or use tax measured by the lessor’s purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1, Reg. 1660(c)(2).) When the lease is a continuing sale and purchase because neither or both of the foregoing conditions are not satisfied, the lease is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) The lessee owes the tax and the lessor is required to collect it from the lessee and pay it to this Board. (Rev. & Tax. Code §§ 6202, 6203, 6204; Reg. 1660(c).) We understand that RIG accumulates commercial real estate information for certain geographic regions and compiles that information onto computer disks and CD ROMs. RIG provides these disks and CD ROMs to its customers on a temporary basis. We further understand that RIG itself places the information on its disks and CD ROMs and does not purchase disks and CDs from a third party which already contain the relevant information. Thus, if RIG is regarded as leasing its disks and CD ROMs to its customers (as opposed to providing a service), tax would apply on the rental receipts from these materials since RIG would not be leasing the property (i.e., the disks and CDs) in the same form as acquired. Where tangible personal property is furnished to a customer to transmit information that was specifically created, collected, or compiled to meet that customer’s particular order, the transaction is regarded as a non-taxable service transaction. (See Reg. 1501.) In that type of situation, the transfer of a single copy of the compiled information on a computer disk or paper report is considered incidental to the providing of the service and tax only applies to the sale of such materials to the seller of the service. (Id.) However, where a transaction involves the delivery of tangible personal property which includes information not customized to a customer’s order (including a report previously prepared by the retailer on a custom basis) or generated from a pre-existing database, the transaction is a sale or lease of tangible personal property and is subject to 2

This tax is imposed on the retailer actually storing, using, or otherwise consuming the property. (Rev. & Tax. Code § 6202.) A retailer engaged in business inside this state is required to collect this tax from its customers and remit it to this Board. (Rev. & Tax. Code §§ 6202, 6203.)

Ms. D--- P---

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October 8, 1996
330.3011.200

tax unless an exemption otherwise applies. (Rev. & Tax. Code §§ 6051, 6201.) Information on computer disk or CD ROM is generally not considered “custom” when the seller/lessor maintains an established price based on the item ordered, the product sold or leased to the customer is generic in nature (e.g., the product is available on a state or county-wide basis), the product is delivered on a medium generally requiring mass production, or the product is generated from a seller’s pre-existing database. We understand that RIG is providing its numerous customers with non-customized information on computer disk and CD ROM at a standardized price. Under these facts, we regard the true object sought by RIGs customers to be the disks and CDs for the information contained in those items and not the providing of a service by RIG. This means that RIG is leasing disks and CDs to its customers not in substantially the same form as acquired. RIG must therefore collect tax on the rentals payable for its disks and CDs and remit these amounts to this Board. If you have any further questions, please write again. Sincerely,

Warren L. Astleford
Tax Counsel

WLA:rz
Enclosure – Reg. 1501

cc:

Out-of-State District Administrator – (OH)