Was a pre-revenue research company's one-time sale of computer-product work in progress taxable when the unfinished software was delivered on tangible media?
Apply this to your situation
This page answers the general question as of 1989. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
A company was attempting to develop a new computer-related product and had received no revenue. Its principal proposed sale assets were software work in progress, such as software connecting a pocket-sized computer to a modem. It proposed selling its assets to a redacted corporation in one transaction.
Electronic transmission was feasible but described as wasteful, so the parties preferred to transfer the work in progress as tangible personal property if they could do so without sales and use tax. The source does not identify the medium, software, transmission burden, or other assets.
The letter said the company was still in research and development, did not hold a seller's permit, and was not required to hold one on the represented facts. Whether it would ever require a permit remained speculative, depending on successful development and progression to production.
Counsel therefore said that if the company sold its work in progress to the named buyer in a single transaction, the sale would be exempt under sections 6006.5(a) and 6367. The letter does not show a completed transfer or tax result.
Proposed facts, permit premise, delivery choice, and source limits
Senior Tax Counsel Donald J. Hennessy wrote on February 22, 1989 to attorney R--- E. C--- of B---, P--- & H---. The request concerned D--- L---, Inc. and proposed buyer P--- C--- Corporation. Hennessy was answering a February 17 letter that requested an occasional-sale opinion under sections 6006.5(a) and 6367. The request is absent.
D--- was still attempting to develop a new computer-related product, remained in the R&D stage, and had received no revenue. Its principal assets to be sold were software work in progress, with pocket-computer-to-modem software given as an example. It held no seller's permit.
The parties could transmit the work electronically but preferred a tangible form because electronic transmission was described as “rather wasteful.” The source does not state whether that waste concerned time, expense, capacity, risk, or something else, and it does not identify disks, tapes, documentation, hardware, source code, licenses, intellectual-property rights, or any other transfer item.
Hennessy said D--- was not required to hold a permit while still in R&D. Future permit status was speculative because it depended both on development success and reaching production. The live annotation goes further by saying the business would have sold the product at retail if development had been completed; the supporting letter instead says future permit status depended on success and progression to production.
The conclusion is expressly conditional: “if” D--- now sold its work in progress in one transaction to P---, that sale would be exempt as occasional. The PDF does not include the request, corporate or ownership records, development plans or status evidence, accounting records proving no revenue, permit search, prior-sale history, software or work-product inventory, electronic-transfer analysis, tangible medium, asset schedule, valuation, price, agreement, invoice, closing, transfer, buyer use, return, audit, assessment, Board adoption, appeal, or later outcome. It does not show that the proposal closed.
The live annotation preserves the developing computer product, no-permit conclusion, speculative completion, single transaction, work in progress, and occasional-sale exemption. It omits the lawyer and parties, February 17 request, no-revenue fact, pocket computer and modem example, principal-asset qualification, feasible but wasteful electronic transmission, preferred tangible delivery, sections 6006.5(a) and 6367, conditional “if” posture, missing records, and absent transaction or outcome. It adds the completed-product retail-sale statement described above.
What this means for you
Pre-revenue technology startups selling unfinished projects
Under this prospective letter, a one-time sale of unfinished work received occasional-sale treatment where the company remained pre-revenue R&D and had not progressed into production or permit-requiring activity.
Accountants and tax professionals
Document the development stage, absence of revenue and prior sales, permit status, asset inventory, medium, buyer, and whether the transaction is genuinely a single disposition.
Common questions
Q: Why was no seller's permit required?
A: The company was still developing the product, had no revenue, and might never reach production.
Q: Did tangible delivery of the unfinished software make the sale taxable?
A: No. The letter applied the occasional-sale exemption to the single transaction.
Q: Would the result necessarily apply after product launch?
A: No. The letter said permit status would depend on whether development succeeded and progressed to production.
Q: Was the transaction limited to one buyer and one sale?
A: The opinion addressed a proposed single sale to one named corporate buyer. The source does not show that it occurred.
Q: What unfinished software did the source identify?
A: It gave software for connecting a pocket-sized computer to a modem as an example of the principal work-in-progress assets.
Q: Why did the parties want tangible delivery?
A: They called electronic transmission feasible but “rather wasteful.” The source gives no medium or further explanation.
Q: Did counsel decide every asset in the proposed sale was exempt?
A: The conclusion expressly addresses selling the work in progress in one transaction. The source does not identify or separately analyze other assets.
Q: Does the source show a completed sale?
A: No. The request and answer are prospective and the PDF includes no agreement, invoice, transfer, return, audit, or later outcome.
Citations and references
- California Revenue and Taxation Code § 6006.5(a)
- California Revenue and Taxation Code § 6367
- February 17, 1989 request — identified and summarized but not included
- R&D, revenue, permit, software, media, electronic-transfer, asset, valuation, agreement, sale, tax, administrative, and outcome records — described or implicated but not included
Verbatim support
From the official February 22, 1989 Donald J. Hennessy letter:
The business is still in the research and development stage and no revenue has been received.
It is feasible, but rather wasteful, to transmit the work in progress electronically from D--- to P--- and the parties would rather transfer the work in progress in the form of tangible personal property if they may do so free from sales and use tax.
Whether or not D--- would ever have been required to hold a seller’s permit is speculative, depending on the success of its research and development and whether it progressed to the production phase.
Therefore, in our opinion, if D--- now sells its work in progress in a single transaction to P---, that sale will be exempt from sales and use tax as an occasional sale within Sections 6006.5(a) and 6367.
Source
- Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
- Live annotation: Annotation 395.1230
- Original supporting opinion: 395.1230 PDF
Original ruling text
395.1230
STATE OF CALIFORNIA
STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2641
February 22, 1989
Mr. R--- E. C--B---, P--- & H--Attorneys at Law
--- Street ----- --- Plaza
--- ---, CA XXXXX
Re:
D--- L---, Inc.
P--- C--- Corporation
Dear Mr. C---:
Your February 17, 1989 letter to me requests our opinion that the following described sale of assets in a single transaction will be an exempt occasional sale under California Revenue and Taxation Code Sections 6006.5(a) and 6367. D--- L---, Inc. (D---) is engaged in the business of attempting to develop a new computer related product. The business is still in the research and development stage and no revenue has been received. Delta now proposes to sell its assets to P--C--- Corporation (P---). The principal assets to be sold are work in progress on software, such as software for use in connecting a pocket sized computer to a modem. D--- does not hold a seller's permit. It is feasible, but rather wasteful, to transmit the work in progress electronically from D--to P--- and the parties would rather transfer the work in progress in the form of tangible personal property if they may do so free from sales and use tax. Given the above facts, we believe that D---, while still in the research and development stage, is not required to hold a seller’s permit. Whether or not D--- would ever have been required to hold a seller’s permit is speculative, depending on the success of its research and development and whether it progressed to the production phase. Therefore, in our opinion, if D--- now sells its work in progress in a single transaction to P---, that sale will be exempt from sales and use tax as an occasional sale within Sections 6006.5(a) and 6367. Sincerely,
Donald J. Hennessy
Senior Tax Counsel
DJH:jb
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