Were charges for turning client timesheets into bills and management reports taxable, and how were related software, training, and installation treated?

Plain-English summary

A new business received employee timesheets from accountants, designers, engineers, and other service firms. It used that client-furnished data to help clients make billing decisions, generated their bills, and produced original accounts-receivable, employee-chargeability, productivity, and fee-analysis reports.

California treated that work as nontaxable processing of customer-furnished information. The provider was performing a service rather than selling the paper on which it delivered bills and reports. It was the consumer of that paper and other tangible property, so tax applied to its purchases of those inputs.

The opinion separately addressed the provider's planned software business. Software sales were taxable. Optional technical assistance and training sold with the software were nontaxable, but separately charged training materials were taxable. Charges to install the sold software were nontaxable.

What this means for you

Billing and reporting providers

Processing each customer's own timesheets into individualized bills and management analysis was treated as a service.

Accountants and tax professionals

Separate data processing from software, training materials, optional assistance, installation, and tax on the provider's consumable inputs.

Common questions

Q: Were the timekeeping and billing charges taxable?

A: No.

Q: Were management reports from client data taxable?

A: No.

Q: Were software sales taxable?

A: Yes.

Q: Were optional training and installation taxable?

A: No, but separately charged training materials were taxable.

Citations and references

• California Sales and Use Tax Regulation 1502(d)(5), (e), (f)(1), and (g)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0830
• Original supporting opinion: 515.0830 PDF

Original ruling text

515.0830

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-6493

February 28, 1989

REDACTED TEXT
REDACTED TEXT
Time keeping and billing service
Dear REDACTED TEXT:
In your October 25, 1988 letter to the Board, which was referred by our Compliance Planning Unit to the legal staff for response, you relate that you recently applied at the Board’s San Francisco office for a seller’s permit, and that office suggested you contact the Board’s headquarters in order to receive a written ruling concerning how the sales and use tax applies to your business. You write: “REDACTED TEXT is a new business which provides a time keeping and billing service to certified public accountants (CPAs), designers, engineers and other service businesses. “Our clients have their employees record the amount of time spent working on distinct tasks throughout the course of the day. Based upon these time sheets we provide our clients with information which assist them in making billing decisions. Then, based upon their decisions, we generate their bills. In addition, we provide a variety of original management reports, such as client accounts receivable, employee chargeability and productivity and fee analysis. Our business is similar to the processing of accounting data by such vendors as ADP and Safeguard Business Systems. “A secondary and unrelated phase of our business will be the sale of computer software to a limited number of clients. We may also provide technical assistance and training related to software installation and operation.

515.0830

-2-

February 28, 1989

“We request that you find the primary business of REDACTED TEXT to be nontaxable under the provisions of Regulation 1502(d)(5), and that you provide us with a written determination.” Opinion We agree with your contention that Regulation 1502(d)(5) applies to your timekeeping and billing services to your clients. In summary, Regulation 1502(d)(5) describes the processing of customer-furnished information as the developing of original information from data furnished by the customer. Contracts for the processing of customer-furnished information are considered to be for the rendition of a service, not the sale of the tangible property on which the information is transmitted or recorded. In your situation, where you receive time sheets from your clients and in return generate their bills and provide management reports, you are providing a nontaxable service for your clients and you are the consumer of the tangible property you use to produce the bills and management reports. Accordingly, tax applies to your purchases of these items for your use in providing these services. Your sales of computer software are subject to sales or use tax (Regulation 1502(f)(1)). If you provide technical assistance and training as optional services in conjunction with your sales of computer software, tax will not apply to those charges. (Regulation 1502(e) and (g)). If you provide training materials for a charge separate from your charges for training services, tax will apply to those charges. (Regulation 1502(e)(2)). Tax does not apply to your charges for installing the software you sell. (Regulation 1502(f)(1)(E)). I enclose a copy of Regulation 1502 for your information. Please feel free to contact me if you have further questions or comments about this letter. Sincerely, John Abbott Tax Counsel JA:jb Enclosure