Were beta-software disks, duplication services, and manuals sent free to testers exempt printed sales messages?

Plain-English summary

A software company mailed early beta versions of its programs free to about 2,000 testers, who used the software and reported bugs before mass production. A supplier asked whether its disks, duplication services, supporting manuals, and shipping charges qualified for the printed-sales-message exemption.

California said software did not fit section 6379.5's narrow list of catalogs, letters, circulars, brochures, and pamphlets. Because exemption statutes could not be expanded beyond their language, tax applied to the disks, disk duplication, and supporting manuals.

Transportation was treated separately. A separately stated charge for moving the software directly to recipients at the software company's direction was nontaxable when transportation used facilities other than the retailer's, consistent with Regulation 1628(a).

What this means for you

Software suppliers, duplication vendors, and tax professionals

Free distribution and a developmental purpose do not transform physical software media into printed sales messages. Separately identify qualifying third-party transportation charges from taxable product and duplication charges.

Common questions

Q: Did free delivery to testers make the disks exempt?

A: No. Computer software was not one of the printed forms covered by the statute.

Q: Were supporting manuals exempt?

A: No. The opinion expressly treated the supporting manuals as taxable with the disks and duplication.

Q: Were shipping charges taxable?

A: Not when separately stated and incurred for qualifying transportation by facilities other than the retailer's directly to the recipients.

Citations and references

• California Revenue and Taxation Code § 6379.5
• California Sales and Use Tax Regulations 1541.5 and 1628(a)
• McConville v. State Board of Equalization, 85 Cal.App.3d 156

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 432.0028
• Original supporting opinion: 432.0028 PDF

Original ruling text

432.0028

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

May 3, 1993

GRAY DAVIS
Controller, Sacramento
BURTON W. OLIVER
Executive Director

REDACTED TEXT
Dear Mr. REDACTED TEXT:
This is in reply to your March 4 letter regarding the application of sales tax to sales to a software company under the following facts you provided. The software company is in the business of selling software for resale. Before the company actually mass produces a product, the company does extensive development by sending early (beta) versions of the software by mail to approximately 2,000 persons for no charge to the recipient. The recipients in turn use the free software and point out any "bugs" to the software company. Given this information, you asked whether the sales of the disks, disk duplicating services, supporting manuals, and shipping costs are exempt from sales tax under Sales and Use Tax Regulation 1541.5, Printed Sales Messages, or other sales and use tax regulations. Regulation 1541.5 provides the application of tax to sales of "printed sales messages". The regulation implements and interprets Revenue and Taxation Code section 6379.5 which provides the exemption for the sale of "catalogs, letters, circulars, brochures, and pamphlets" consisting substantially of printed sales messages for goods and services. As an exemption statute, section 6379.5 must be strictly construed. The Board cannot enlarge nor extend the exemption beyond the plain meaning of the language employed. (McConville v. State Board of Equalization, 85 Cal.App.3d 156.) Accordingly, we do not believe that the exemption applies to the sale of computer software. Tax applies to the sale to the software company of the disks, the disk duplicating, and the supporting manuals. For your further information, we are sending a copy of Sales and Use Tax Regulation 1628, Transportation Charges. Generally, tax does not apply to separately stated charges for transportation of property from the retailer's place of business or other point from which shipment is made directly to the purchaser provided the transportation is by other than facilities of the retailer. (Reg. 1628, subd. (a).) Tax would not apply to the retailer's separately stated charge for transporting the software to the recipients as directed by the software company.

432.0028

-2-

May 3, 1993

We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours, Ronald L. Dick Senior Tax Counsel RLD:sr Enc.