Was web-site design taxable when a customer supplied its computer and existing software, the designer modified the software, and no tangible copy or manual was delivered?

Plain-English summary

An online-media company consulted, created, designed, hosted, authored, registered, upgraded, and maintained websites. For the transaction at issue, the customer supplied computer hardware containing existing software. The designer or a third party working for it modified that software so the website design would function, then returned the customer's materials.

Tax counsel assumed the designer delivered no modified software on disks, tapes, or another physical medium and supplied no program documentation, manuals, or other tangible personal property.

On those assumptions, the company did not make a taxable sale. It neither furnished tangible property nor fabricated the customer-supplied property. The work was treated as reprogramming or reconditioning the customer's computer by modifying existing software to create a website that was not transferred in tangible form.

What this means for you

Web designers and developers

The historical opinion treated software modification as nontaxable when the customer supplied the system and the finished website was not delivered on a physical medium.

Businesses commissioning websites

The conclusion depended on what was delivered. Physical software copies, manuals, or other tangible outputs were expressly outside the assumed facts.

Accountants and tax professionals

Document ownership of the hardware and software, the subcontractor's role, what is returned, and whether any tangible deliverable changes hands.

Common questions

Q: Was the website-design charge taxable?

A: No, under the assumptions stated in the opinion.

Q: Did using a third party to modify software change the result?

A: No. The third party acted on the designer's behalf, and no tangible software copy or other property was delivered.

Q: What property did the customer provide?

A: Computer hardware containing the software that would be modified.

Q: What facts could change the answer?

A: Delivering modified software on a disk or tape, or furnishing program documentation, manuals, or other tangible property, was outside the opinion's assumptions.

Citations and references

• California Revenue and Taxation Code §§ 6006 and 6051

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0062.200
• Original supporting opinion: 515.0062.200 PDF

Original ruling text

STATE OF CALIFORNIA
515.0062.200
STATE BOARD OF EQUALIZATION
JOHAN KLEHS
LEGAL DIVISION (MIC:82)
First District, Hayward
450 N STREET, SACRAMENTO, CALIFORNIA
DEAN ANDAL
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082) Second District, Stockton Telephone: (916) 324-2637
FAX: (916) 323-3387
ERNEST J. DRONENBURG, JR.
Third District, San Diego

BRAD SHERMAN
Fourth District, Los Angeles
October 10, 1996
KATHLEEN CONNELL
Controller, Sacramento

Ms. L--- T---
E. L. Sorensen, Jr.
Executive Director
A--- M---
XXX --- Street
--- ---, California XXXXX

Re: Request for Opinion;
Web Site Design

Dear Ms. T---:

This is in response to your September 24, 1996 letter to Supervising Tax Counsel David Levine regarding the application of tax on your company’s operations. Our understanding of the facts surrounding your present inquiry is based on your September 24 and September 13, 1996 letters to us.

Your September 13, 1996 letter states:

“In essence we are an online media provider with a focus on the Internet and electronic communication systems for all interactive media applications. We will consult, create, design, host, author, register, upgrade and maintain Web sites.
Prior to the actual art creation, we need to plan with the client a flow chart which indicates how the site is to function (inter links)....”

Your September 24, 1996 letter adds:

“[T]he customer will be furnishing hardware and software to us for the design of an Internet web site. In the midst of the project we will have to use a third party to do some sophisticated modifications to the software, for the designs to be compatible. The unit will be returned to us for completion.
Ultimately, the unit will be returned to the client to host on their own equipment or another ISP.”

Page 2

Ms. L--- T--- -2- October 10, 1996
515.0062.200

Discussion

California imposes a sales tax on a retailer’s gross receipts from the retail sale of tangible personal property inside this state unless the sale is specifically exempt from taxation by statute.
(Rev. & Tax. Code § 6051.) A sale generally includes any transfer of title or possession of tangible personal property or the fabricating of customer-furnished property for consideration. (Rev. & Tax. Code § 6006.)

You state that your customer will provide you with computer hardware and software that either you or a third party (on your behalf) will operate and modify in order to design a web site.
We assume that the customer’s computer hardware contains the software that your company will modify and that your company (or the third party working on your company’s behalf) will not provide the customer with any copies of the modified software in tangible form (i.e., floppy disks, computer tapes, etc.) or any other tangible personal property such as a program documentation or manuals. We also understand that your company will return all materials provided by your customer back to that customer upon completion of your work.

Under these facts, we do not regard your company as making a taxable sale since your are neither providing any tangible personal property to your customer nor fabricating the property provided to your company from your customer. Instead, we regard your company as merely reprogramming or reconditioning the computer hardware provided to it by modifying the existing software in order to create a computer web site that is not transferred to your customer in tangible form.

If you have any further questions, please write again.

Sincerely,

Warren L. Astleford
Tax Counsel

WLA:rz

cc: --- --- District Administrator - (--)