Was a computer consulting company's $700,000 sale of 13 programs exempt as an occasional sale when it had recently sold hardware?

Plain-English summary

A computer consulting company sold all its business assets in March 1990. The sale included three prewritten and ten specially designed computer programs for one $700,000 price. The company argued that its main activity was custom programming and consulting and that the program sale was an exempt occasional sale.

The Appeals reviewer treated the consulting and sales operations as one business. The company offered hardware as part of its customer business even though few customers bought hardware during the final year.

Its actual sales also established retailer status. In December 1989, the company made 14 separate sales of repossessed computers and related hardware to individual customers for $14,520. It also sold two complete systems for $5,000 in August 1989. The 14 transactions could not be collapsed into one liquidation sale, and the $5,000 sale was not insubstantial.

Because the company was a seller of tangible personal property by both business activity and actual sales, the reviewer concluded that the $700,000 program transfer did not qualify as an occasional sale. The recommendation was to deny the petition and the two related protective refund claims.

Proceeding record and limits

Senior Staff Counsel H. L. Cohen held the appeals conference on April 15, 1992 in San Diego. The petitioner appeared through its controller and attorney; a San Diego District tax auditor appeared for the Sales and Use Tax Department. The protested period was January 1, 1987 through March 12, 1990, and the only listed protested item was the unreported computer-program sale measured by $700,000. The source calls this the company's first audit and a close-out audit caused by the March 12, 1990 business-asset sale.

The decision reports the transaction and sales history but does not include the petition, audit report or workpapers, asset-purchase agreement, program inventory or licenses, software-development records, valuation or price allocation, invoices, repossession documents, customer contracts, seller's permit, returns, assessment calculation, conference transcript or exhibits, the July 17 and July 27, 1990 protective refund claims, or any final Board decision, payment, appeal, or refund disposition.

The reviewer's conclusion rested on two routes to retailer status. First, consulting and sales were operated as one business; few recent hardware sales reflected customer demand, not withdrawal from the hardware business. Second, the 14 December 1989 sales went to 14 individual customers and the August 1989 $5,000 transaction covered two complete systems. The reviewer therefore would not recast the repossessed-equipment sales as one liquidation or disregard the earlier system sale.

The live annotation preserves those two retailer-status routes and the conclusion that the successor asset sale was taxable. It omits the close-out audit and conference posture, audit period, $700,000 measure, 13-program mix, exact hardware-sale amounts, repossession history, the petitioner's Touche Ross argument, the reviewer's response, the two refund claims, and the absence of a final outcome. It also cites Revenue and Taxation Code section 6015 for the 14-sales point, while the supporting PDF does not cite that section; the PDF instead quotes Regulation 1595(a)(1) and discusses section 6019.

What this means for you

Consulting firms selling an entire business

A service-heavy label did not protect the asset sale when hardware sales were integrated into the same business and recent transactions required retailer treatment.

Accountants and tax professionals

Review all sales in the relevant 12-month windows, count separate customers and transactions, and determine whether service and sales activities are truly separate enterprises.

Common questions

Q: How many programs were sold?

A: Thirteen—three prewritten and ten specially designed for the company.

Q: What price was assigned to them?

A: $700,000 in a lump sum.

Q: Why did the 14 repossessed-equipment sales count separately?

A: They were sales to 14 individual customers, not one liquidation transaction.

Q: Was the $5,000 system sale ignored as insubstantial?

A: No.

Q: What was the recommendation?

A: Deny the petition and the related protective refund claims.

Q: Does the PDF show a final Board decision or payment result?

A: No. It ends with the appeals reviewer's recommendation and does not include later action or disposition.

Q: Did the published record include the sale agreements or audit workpapers?

A: No. The decision summarizes the relevant facts but does not attach those underlying records.

Citations and references

• California Revenue and Taxation Code §§ 6006.5, 6019, and 6367
• California Revenue and Taxation Code § 6015 — cited by the live annotation, not by the supporting PDF
• California Sales and Use Tax Regulation 1595(a)(1) and 1595(a)(5)(B)2
• Touche Ross & Company v. State Board of Equalization, 103 Cal.App.3d 1057
• July 17 and July 27, 1990 protective refund claims — identified but not included
• Petition, audit report and workpapers, agreements, software records, valuation, sales records, permits, returns, assessment, conference exhibits, final decision, payment, appeal, and refund-disposition records — implicated but not documented

Verbatim support

From the official May 22, 1992 appeal recommendation:

Petitioner is a corporation which was engaged in providing computer consulting services with sales of computer hardware and software. It began in business in July 1985. There has been no prior audit. This audit was a close-out audit occasioned by the sale of the business assets.

Petitioner’s consulting activities and its sales activities unquestionably constitute a single business.

There were 14 individual customers. I regard 14 sales of hardware in one month to be a substantial number of sales. I do not regard the $5,000 sale to B--- & T--- as being for an insubstantial amount.

Recommendation
Deny the petition. Deny the related protective claims for refund dated July 27, 1990 and July 17, 1990.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0009
• Original supporting opinion: 395.0009 PDF

Original ruling text

STATE OF CALIFORNIA

395.0009

BOARD OF EQUALIZATION
BUSINESS TAXES APPEAL REVIEW SECTION

In the Matter of the Petition
for Redetermination and the
Claims for Refund Under the
Sales and Use Tax Law of:

THE D--- M--- G---, INC.

Petitioner

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DECISION AND RECOMMENDATION

No. SR --- XX-XXXXXX-010

The Appeals conference in the above-referenced matter was held by Senior Staff Counsel H. L. Cohen on April 15, 1992, in San Diego, California.

Appearing for Petitioners:

Mr. J. T--Controller
Mr. R. C--Attorney at Law

Appearing for the Sales and
Use Tax Department:

Ms. M. Reilly
Tax Auditor
San Diego District
Protested Item

The protested tax liability for the period January 1, 1987 through March 12, 1990 is measured by:

A.

Item

State, Local
and County

Unreported sale of computer programs

$700,000

THE D--- M--- G---, INC.
SR FHB XX XXXXXX-010

-4-

May 22, 1992
395.0009

Contention
Petitioner contends that the sale in question was an exempt occasional sale. Summary Petitioner is a corporation which was engaged in providing computer consulting services with sales of computer hardware and software. It began in business in July 1985. There has been no prior audit. This audit was a close-out audit occasioned by the sale of the business assets. On March 12, 1990, petitioner sold all of its assets to B--- S---, Inc. Included in the sale were 13 computer programs used by petitioner in the conduct of its business. Three of these programs were pre-written and 10 were programs which had been specifically designed for petitioner’s use. The lump-sum sales price for the 13 programs was $700,000. The auditor, relying on Touche Ross & Company v. State Board of Equalization, 103 Cal.App.3d 1057, concluded that these computer programs were not custom computer programs when sold by petitioner. The sale of the programs was therefore regarded as subject to tax. Petitioner points out that in the Touche Ross case, the court stated that “most secondary sales of custom computer programs designed to the special order of the selling party come within the occasional sale exemption created by Sections 6367 and 6006.5(a)”. Petitioner contends that the sale of the programs constituted an occasional sale because petitioner’s principal business operation for the 12 months preceding the sale of assets consisted of custom programming and consulting which do not require the holding of a seller’s permit. Petitioner had made no sales of tangible personal property during the first two calendar quarters of 1989. In December 1989, petitioner made 14 individual sales of used computers and related hardware. The total amount of these sales was $14,520. The equipment sold in these 14 sales had previously been sold in a single sale of a system to I--- V---, but had been repossessed. After the repossession, the individual components were separately sold. In August 1989, petitioner sold two complete systems to B--- & T--- for $5,000. Petitioner contends that it had no choice as to the repossessed equipment and that the disposal of this equipment should be viewed as a single liquidation sale. Petitioner contends that the sale to B--- & T--- should be regarded as insubstantial. If the sale of the repossessed equipment is regarded as a single sale and the B--- & T--- sale is disregarded, then the final sale of assets would be regarded as an occasional sale because petitioner would not be a retailer under the “three sale” rule of Section 6019 of the Revenue and Taxation Code. Petitioner also contends that it is unfair that a relatively small amount of earlier sales should trigger a large tax liability at a later time.

THE D--- M--- G---, INC.
SR FHB XX XXXXXX-010

-4-

May 22, 1992
395.0009

Analysis and Conclusions
Section 6367 of the Revenue and Taxation Code exempts occasional sales from tax. Section 6006.5 defines “occasional sale” to include the sale of property not held in the course of activities which require the holding of a seller’s permit. Sales and Use Tax Regulation 1595 provides in pertinent part of subdivision (a)(l): “Generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller’s permit. A person who makes a substantial number of sales for relatively small amounts is also required to hold a seller’s permit. “Tax does not apply to a sale of property held or used in the course of an activity not requiring the holding of a seller’s permit unless the sale is one of a series of sales sufficient in number, scope and character to constitute an activity for which the seller is required to hold a seller’s permit or would be required to hold a seller’s permit if the activity were conducted in this state.” The portion of the decision in Touche Ross cited by petitioner deals with businesses which do not sell tangible personal property. For example, an accounting firm which sells all of its assets in a single sale would not be taxable on the secondary sale of its custom computer programs. The question to be decided here is whether petitioner should be regarded as a seller of tangible personal property. If petitioner is regarded as a seller of tangible personal property, then the tax is properly applied to the sale of the programs in question. Subdivision (a)(5)(B)2 of the regulation provides that where a service enterprise and a sales business are operated together so as to constitute one business, tax will apply to the sale of the assets of the business. Petitioner’s consulting activities and its sales activities unquestionably constitute a single business. Although petitioner made few sales of tangible personal property during the 12-month period immediately preceding its asset sale, it was not because petitioner was not in the business of selling tangible personal property. It was because none of petitioner’s customers during that period wished to buy hardware from petitioner. Looking to the “three sale” rule, there is no basis to regard the 14 sales of repossessed equipment as a single sale. There were 14 individual customers. I regard 14 sales of hardware in one month to be a substantial number of sales. I do not regard the $5,000 sale to B--- & T--- as being for an insubstantial amount. I conclude that petitioner was a seller of tangible personal property, both from the fact that it was in the business of selling hardware and from the fact that it made substantial sales of hardware both in quantity of sales and the dollar value of sales.

THE D--- M--- G---, INC.
SR FHB XX XXXXXX-010

-4-

May 22, 1992
395.0009

While it is unfortunate that the sales in question triggered a tax liability in excess of the amount of the sales, that is no basis under the law for granting relief. Recommendation Deny the petition. Deny the related protective claims for refund dated July 27, 1990 and July 17, 1990.

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H. L. Cohen, Senior Staff Counsel

5-22-92
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Date