Were disks, duplication, manuals, and shipping for free beta software sent to about 2,000 testers exempt as printed sales messages?

Plain-English summary

A software company mailed early beta versions to about 2,000 people without charge so they could use the program and report bugs before mass production. The company asked whether disks, duplication, supporting manuals, and shipping qualified for the printed-sales-message exemption.

California said the exemption for catalogs, letters, circulars, brochures, and pamphlets consisting substantially of printed sales messages did not extend to computer software. The company's purchases of the disks, disk-duplicating services, and manuals were taxable.

Separately stated transportation from the retailer's shipping point directly to recipients was not taxable when performed by someone other than the retailer's own facilities.

What this means for you

Software developers

Giving beta copies away for testing did not make physical software media and manuals exempt promotional material.

Fulfillment and shipping teams

Separately state qualifying third-party transportation and preserve who performed it and from where shipment began.

Accountants and tax professionals

Separate software media, duplication, manuals, promotional content, fulfillment, and retailer-versus-carrier delivery charges.

Common questions

Q: Were the beta-software disks taxable?

A: Yes.

Q: Were disk duplication and supporting manuals taxable?

A: Yes.

Q: Did the printed-sales-message exemption apply?

A: No. Counsel said it could not be extended to computer software.

Q: Were shipping charges taxable?

A: Not when separately stated and meeting Regulation 1628(a)'s third-party transportation conditions.

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 (1978)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0450
• Original supporting opinion: 515.0450 PDF

Original ruling text

515.0450

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.

515.0450

-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.