Did California sales or use tax apply to reciprocal manufacturing licenses, electronic technical information, and related tooling delivered inside or outside California?

Plain-English summary

Two companies with proprietary semiconductor-related products wanted alternate suppliers. Four agreements allowed each to manufacture and sell the other's products and transferred related technical and tooling materials.

Under the basic reciprocal license, the parties paid 7 percent and 4 percent royalties and electronically transmitted technical information in human-readable form. Because no tangible personal property was transferred, California sales and use tax did not apply.

One $50,000 tooling agreement delivered diagrams, specifications, database tapes, drawings, samples, wafers, masks, and a cell book outside California for exclusive use there. California sales and use tax did not apply.

Another tooling purchase also occurred outside California. California sales tax did not apply, but use tax could apply if the purchaser later used the property in California. The opinion assumed no California use on the supplied facts.

A final $50,000 agreement transferred tooling for use in California and called for delivery at the United States point of entry. Assuming delivery at a California port and no California offices or agents for the seller, the purchaser owed California use tax measured by the $50,000 price.

What this means for you

Technology licensors and manufacturers

Electronic information without physical property received different treatment from tooling, tapes, drawings, samples, wafers, and masks transferred under related agreements.

Accountants and tax professionals

Analyze each agreement separately and document the transfer medium, delivery point, title terms, seller presence, destination, actual use, price, and royalty structure.

Common questions

Q: Were the reciprocal manufacturing licenses taxable?

A: No, because the agreement transferred no tangible personal property.

Q: Was tooling delivered and used entirely outside California taxable?

A: No, under the stated facts.

Q: Could out-of-state tooling become subject to California use tax?

A: Yes, if it was later used in California.

Q: What happened to the $50,000 tooling delivered at a California port for California operations?

A: The opinion treated the purchaser as owing use tax measured by $50,000, subject to its stated assumptions.

Citations and references

• California Revenue and Taxation Code §§ 6006(a), 6010.5, 6051, 6201, and 6202
• California Sales and Use Tax Regulations 1620(a) and (b) and 1628(b)(3)(D)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.1181
• Original supporting opinion: 515.1181 PDF

Original ruling text

515.1181

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 1799, SACRAMENTO, CALIFORNIA 95808)
(916) 445-8485

CONWAY H. COLLIS
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

July 11, 1985

REDACTED TEXT

RICHARD NEVINS
Fourth District, Pasadena
KENNTH CORY
Controller, Sacramento
DOUGLAS D. BELL
Executive Secretary

This is in response to your letters dated May 7 and June 28, 1985. You asked that we examine the four agreements which you furnished us and render our views as to how the California Sales and Use Tax Law applies with respect to them. We understand REDACTED TEXT a California corporation, has developed a dual universal synchronous communication controller and an asynchronous communications interface as proprietary products. REDACTED TEXT has developed an advanced cathode ray tube controller as a proprietary product. Both REDACTED TEXT and REDACTED TEXT desire to have an alternate source supplier for their products and have agreed upon a series of four agreements which together enable REDACTED TEXT and REDACTED TEXT manufacture and sell the products developed by the other. Listed below are brief descriptions of the four agreements which you provided us followed, in each case, by our opinion as to the application of the law. REDACTED TEXT This is the basic agreement whereby REDACTED TEXT and REDACTED TEXT license each other to manufacture and sell each other’s products in exchange for 7 percent and 4 percent royalties. In connection with this agreement, technical information in human readable form is transmitted electronically between the parties. No tangible personal property is transferred. Opinion Since there is no transfer of tangible personal property pursuant to this agreement, neither sales nor use tax applies. REDACTED TEXT Tooling Agreement Pursuant to this agreement, REDACTED TEXT purchases, for delivery in REDACTED TEXT, semi-conductor development, design, and process materials from REDACTED TEXT. These items, which are useful to REDACTED TEXT in producing the REDACTED TEXT product, include: diagrams, design specifications, data base tapes, various drawings, test samples, wafers, masks, and a cell book. The sales price for these items is $50,000.

515.1181

2

July 11, 1985

Opinion
Since delivery of these items is to REDACTED TEXT in REDACTED TEXT with use thereafter exclusively in REDACTED TEXT, neither California sales nor use tax applies with respect to their acquisition or subsequent use (See Rev. & Tax. Code §§6051, 6201). REDACTED TEXT Tooling Agreement Pursuant to this agreement, REDACTED TEXT, related to REDACTED TEXT purchases from REDACTED TEXT for delivery in REDACTED TEXT, essentially the same types of items listed in the REDACTED TEXT Tooling Agreement above. Opinion Since the sale of these items occurs in REDACTED TEXT, the California Sales Tax does not apply (see Rev. & Tax. Code § 6051, Reg. 1620(a), copy enclosed). However, the use tax could apply if REDACTED TEXT utilized the items in question in California (see Rev. & Tax. Code §6201; Reg. 1620(b)). Since the facts do not indicate REDACTED TEXT will be using the items in California, we assume such use will not be made by it here and that, therefore, use tax will not apply. REDACTED TEXT Tooling Agreement This agreement transfers the tangible personal property acquired by REDACTED TEXT, in the REDACTED TEXT Tooling Agreement, to REDACTED TEXT. There is no mention in the agreement regarding when title passes. However, the agreement indicates delivery to REDACTED TEXT occurs at point of entry (P.O.E.) to the United States. The purchase price is
$50,000 and REDACTED TEXT intends to utilize the items in question in its California operations. Opinion Assuming delivery occurs at a California port, it is our view that the sale occurs at that point (see Rev. & Tax. Code §§6006(a), 6010.5; 1628(b)(3)(D)). Further, assuming that REDACTED TEXT has no offices or agents in California, the applicable tax is a use tax on REDACTED TEXT measured by the
$50,000 sales price (see Rev. & Tax. Code §§6201, 6202; Reg. 1620(b)). Very truly yours, E. Leslie Sorenson, Jr. Tax Counsel ELS:ms Enclosure cc: Mr. Donald J. Hennessy