Were charges for converting customer programs and data to a different computer system taxable when the translated material was returned on customer media?

Plain-English summary

A company translated customer materials so programs and files used on one manufacturer's computer system would work on another. It received application programs and file records or data on customer tapes or disks and returned translated material on customer-furnished media.

California split the work into two categories. Translating application programs was a nontaxable modification of a computer program under Revenue and Taxation Code section 6010.9. That result applied even if a prewritten program was involved and regardless of whether people or machines performed the translation.

Converting file records or data was taxable. Those materials were not computer programs under section 6010.9, and the customers sought the resulting tapes or disks rather than translation services by themselves. Manual skill did not change the result, nor would later mechanical conversion.

The hearing officer recommended removing application-program translation charges from the tax measure while leaving the data-conversion charges taxable.

What this means for you

Software and data-conversion companies

The source distinguished executable or functional application code from customer content and data, even when both were processed through similar technical steps.

Accountants and tax professionals

Classify each converted item, document whether it is a program or data, and separately track labor, customer media, output media, digital delivery, and any prewritten-program component.

Common questions

Q: Was application-program translation taxable?

A: No.

Q: Did the exemption depend on human translators doing the work?

A: No.

Q: Was conversion of file records or data taxable?

A: Yes, whether manual or mechanical.

Citations and references

• California Revenue and Taxation Code § 6010.9(c) and (d)
• California Sales and Use Tax Regulations 1501 and 1502(d)(1)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0031
• Original supporting opinion: 515.0031 PDF

Original ruling text

515.0031
STATE OF CALIFORNIA
BOARD OF EQUALIZATION
In the Matter of the Petition for
Redetermination Under the Sales
and Use Tax Law of:
REDACTED TEXT
Taxpayer

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DECISION AND RECOMMENDATION
REDACTED TEXT

The preliminary hearing on the above taxpayer’s petition for redetermination was held on January 16, 1985, in Culver City, California. Hearing Officer:

James E. Mahler

Appearing for Petitioner:

REDACTED TEXT

Appearing for the Board:

Marc Laxer
District Principal Auditor
Protested Item

by:

The protested tax liability for the period February 8, 1980, through June 30, 1983, is measured State, Local and County

Item
B.

Fabrication labor in connection with the
conversion of customer-furnished data
not reported.

REDACTED TEXT

Taxpayer’s Contentions
1.

Petitioner’s custom conversions are nontaxable services and are not taxable sales.

2.

Petitioner’s custom conversions constitute nontaxable customer computer programs. Summary

Under the current state of computer technology, computer systems manufactured by different companies usually use different programming codes. When a user acquires new equipment, therefore, its old programs must be translated into the new codes.

515.0031
Petitioner performs such translations for its customers, primarily for word processing systems. Two types of materials require translation: application programs which tell the word processing machine how and when to perform certain functions, such as starting new paragraphs; and file records or data, such as the texts of form letters or contracts. The translation requires additions and deletions of codes and some reformatting of the file records, but otherwise involves no compilation or manipulation of the data. Petitioner receives the old programs from its customers on magnetic tapes or disks. It records the translated programs onto tapes or disks furnished by the customer, but it is not clear whether these are the same disks on which the old programs were recorded. According to testimony at the preliminary hearing, during the audit period the translation required substantial expertise and technical skill by petitioner's employees. On that basis, petitioner argues that the translation was a service and not a sale. Recently, however, petitioner has acquired a computer system which can do the translation mechanically, and petitioner believes that mechanical translation would be taxable. Analysis and Conclusions Revenue and Taxation Code Section 6010.9 provides that the terms "sale" and "purchase" do not include the "translation… of a custom computer program, other than a basic operational program…." Subdivision (d) of that Section further provides: "Modification to an existing prewritten program to meet the customer's needs is custom computer programming only to the extent of the modification." The term "computer program" is defined in subdivision (c) to mean:
…the complete plan for the solution of a problem, such as the complete sequence of automatic data-processing equipment instructions necessary to solve a problem and includes both systems and application programs and subdivisions, such as assemblers, compilers, routines, generators, and utility programs. A portion of petitioner's business involves the translation of application programs. Even if these programs are prewritten and not custom programs, the translation is a “modification” within the meaning of Section 6010.9, and is therefore not a taxable sale or purchase, regardless of whether it is done mechanically or by human translators. The rest of petitioner's business involves the translation of file records or data. Such materials are not “programs” as defined in Section 6010.9, and the translation does not qualify for exemption under that section. The question is whether the translation may qualify for exemption as a service. Sales and Use Tax Regulation 1501 provides that the test for distinguishing taxable sales from exempt services if “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.” In this case, petitioner's customers desire the property produced by the translation services, namely, tapes or disks on which the translated materials are recorded, and do not desire the translation services per se. Accordingly, the translation of file records and data is not an exempt service and is subject to tax, regardless of whether it is done mechanically or by human translators. (See also Sales and Use Tax Reg. 1502, subd. (d) (1).)

515.0031
Recommendation
Reaudit to delete charges for translating application programs from the measure of tax. Necessary adjustments are to be initiated by REDACTED TEXT.

__________
James E. Mahler, Hearing Officer

9/25/85
Date

REVIEWED FOR AUDIT:
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Principal Tax Auditor

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Date