Were computer-aided drafting output and charges for modifying a customer's existing electronic drawing files taxable?

Plain-English summary

A computer-aided drafting company argued that clients bought its labor and support services rather than the resulting output. California disagreed: when the company created detailed drawings from customer specifications, clients sought the special-order drawings, making the charges taxable property sales.

The company also modified electronic drawing files it had originally created by moving information between layers, adding or deleting data through keyboard strokes, and returning the files on the same medium. Those charges were taxable as altering customer-furnished tangible property or recording information onto it.

The requester also asked whether competitors paid tax. Revenue and Taxation Code § 7056 prevented the Board from disclosing another taxpayer's information; counsel forwarded the requester's list of similar businesses to the Compliance Planning Unit instead.

What this means for you

CAD and drafting businesses

Labor-intensive production remained taxable when the customer's true object was the finished drawing output.

Digital-file service providers

Under the source's historical physical-media rule, editing customer-furnished disks was taxable even when no new material medium was added.

Accountants and tax professionals

Review who supplies specifications and media, the contract's true object, file-return method, drawing output, data-layer changes, and current digital-delivery rules.

Common questions

Q: Were CAD drawings based on customer specifications taxable?

A: Yes.

Q: Did substantial drafting labor make the transaction a service?

A: No. The output remained the true object.

Q: Were charges for modifying an existing customer disk taxable?

A: Yes.

Q: Could the Board disclose how competitors reported tax?

A: No. Taxpayer confidentiality prohibited it.

Citations and references

• California Revenue and Taxation Code §§ 6006(f) and 7056
• California Sales and Use Tax Regulation 1502(c)(2)
• Albers v. State Board of Equalization, 237 Cal.App.2d 494 (1965)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0018
• Original supporting opinion: 515.0018 PDF

Original ruling text

515.0018

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

1020 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
GRAY DAVIS
Controller, Sacramento

March 23, 1992

BURTON W. OLIVER
Executive Director

Mr. B--- A--XXXX Xth Street
---, CA XXXXX
Dear Mr. A---:
This is in reply to your January 9, 1992 letter regarding the application of sales tax to your charges for Computer Aided Drafting (CAD) support activities. You note that you believe that the true object of your contracts is the services rendered in producing the output and not the output itself. Under the Sales and Use Tax Law, the transfer of title or possession of tangible personal property for a consideration is a sale. Although a great deal of the value of the tangible personal property you provide is the result of your labor, nonetheless, the object of your client’s contract is the output. Revenue and Taxation code section 6006 defines sale to include a transfer for a consideration of the title or possession of tangible personal property which has been produced or fabricated to the special order of the customer. The California Court of Appeals held in Albers v. State Board of Equalization, 237 Cal.App2d 494, that, when a draftsman makes detailed drawings based upon specifications furnished by his or her customer, the true object of the transaction is the drawings and not the designs or specifications pictured therein. Such transactions are sales under subdivision (f) of section 6006. You note also that you are concerned that all California companies conducting activities such as you are treated the same under the law. You asked how you can ascertain whether such companies are charging sales tax reimbursement or use tax on their sales. This Board is prohibited, pursuant to Revenue and Taxation Code section 7056, from making known in any manner any information pertaining to any person required to report to the Board. We suggest then that you contact the businesses to determine whether they consider their charges as subject to tax. You may then provide any information you deem necessary to this Board’s Compliance Planning Unit at this address. You earlier sent a list of similar businesses. I am sending that list to the Compliance Planning Unit with a copy of this letter.

Mr. B--- A---

-2-

March 23, 1992
515.0018

Finally, you note the following facts regarding a recent request from a customer to modify existing electronic files of information: “These files had originally been created by my company. The customer then decided certain changes (additions and deletions) would be required. The service of modifying the data was manually completed using keyboard strokes and the files were returned to the customer on the same medium. No new materials inputs were required, nor were the existing files’ data electronically processed. The customer was billed an additional charge for the service of making the requested changes to the drawing data. (Information removed from layer X and placed on layer Y of the existing drawing file.)” The charges you described are subject to tax. As provided at subdivision (c)(2) of Regulation 1502: “Charges for producing, fabricating, processing, printing, imprinting or otherwise physically altering, modifying or treating consumer-furnished tangible personal property (cards, tapes, disks, etc.), including charges for recording or otherwise incorporating information on or into such tangible personal property are generally subject to tax.” 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.
cc:

Compliance Planning Unit