Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2011
 

Sales And Use Tax Regulations

Article 1. Service Enterprises

Sales And Use Tax Regulations

Article 1. Service Enterprises

Regulation 1501. Service Enterprises Generally.

Reference: Sections 6006 and 6015, Revenue and Taxation Code.

Persons engaged in the business of rendering service are consumers, not retailers, of the tangible personal property which they use incidentally in rendering the service. Tax, accordingly, applies to the sale of the property to them. If in addition to rendering service they regularly sell tangible personal property to consumers, they are retailers with respect to such sales and they must obtain permits, file returns and remit tax measured by such sales. If their purchases of tangible personal property are predominantly for consumption rather than for resale, they should not give resale certificates covering such purchases but should follow the procedure prescribed in the regulation governing "Tax-Paid Purchases Resold."

The basic distinction in determining whether a particular transaction involves a sale of tangible personal property or the transfer of tangible personal property incidental to the performance of a service is one of 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. If the true object of the contract is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred. For example, a firm which performs business advisory, record keeping, payroll and tax services for small businesses and furnishes forms, binders, and other property to its clients as an incident to the rendition of its services is the consumer and not the retailer of such tangible personal property. The true object of the contract between the firm and its client is the performance of a service and not the furnishing of tangible personal property. Similarly, an idea may be expressed in the form of tangible personal property and that property may be transferred for a consideration from one person to another; however, the person transferring the property may still be regarded as the consumer of the property. Thus, the transfer to a publisher of an original manuscript by the author thereof for the purpose of publication is not subject to taxation. The author is the consumer of the paper on which he has recorded the text of his creation. However, the tax would apply to the sale of mere copies of an author's works or the sale of manuscripts written by other authors where the manuscript itself is of particular value as an item of tangible personal property and the purchaser's primary interest is in the physical property. Tax would also apply to the sale of artistic expressions in the form of paintings and sculptures even though the work of art may express an original idea since the purchaser desires the tangible object itself; that is, since the true object of the contract is the work of art in its physical form.

When a transaction is regarded as a sale of tangible personal property, tax applies to the gross receipts from the furnishing thereof, without any deduction on account of the work, labor, skill, thought, time spent, or other expense of producing the property.

Examples of service enterprises and regulations pertaining thereto will be found in regulations which follow.

History: Effective August 1, 1933.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended and renumbered November 3, 1969, effective December 5, 1969.


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Regulation 1501.1. Research and Development Contracts.

Reference: Sections 6006, 6009, 6010, 6011, and 6012, Revenue and Taxation Code.

(a) DEFINITIONS.

(1) QUALIFIED RESEARCH AND DEVELOPMENT CONTRACT. A qualified research and development contract is a contract for a service where:

a. the service provided under the contract is undertaken for the purpose of discovering information which is technological in nature, the results of which are intended to be useful in the development of a new or improved product, process, technique, or invention, and

b. the contract calls for the delivery of a report detailing information developed by the contractor or other tangible personal property incidental to the true object of the contract, as defined in Regulation 1501 (18 CCR 1501).

A qualified research and development contract shall not include a contract for research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic, or seasonal design factors. A qualified research and development contract shall also not include a contract for the design and production of a custom-made item as defined in subdivision (a)(5).

(2) RESEARCH. A planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (product) or a new process or technique (process) or in bringing about a significant improvement to an existing product or process.

(3) DEVELOPMENT. The translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.

"Development" includes the conceptual formulation, design, and testing of product alternatives, and construction of prototypes but does not include:

a. routine or periodic alterations to existing products, production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements, and

b. market research or market testing activities.

(4) TANGIBLE PERSONAL PROPERTY. Tangible personal property transferred in a qualified research and development contract includes, but is not limited to the following:

a. Appearance model—a non-operating model of a design that is a physical representation of the design which is used to convey the image, texture and appearance of the design.

b. Prototype model—an operating model of a design the purpose of which includes:

1. validating design concepts,

2. validating design specifications,

3. demonstrating design integrity, or

4. demonstrating manufacturability of the design.

c. Prototype or temporary tooling—tooling produced and used in the development of prototypes.

(5) CUSTOM-MADE ITEMS. A custom-made item includes, but is not limited to the following:

a. Property the purchaser wants for its intrinsic value as an item, and for which the purchaser is not interested in the data developed in the course of the manufacture of the custom-made item.

b. Property the purchaser will use for purposes other than informational and testing purposes as defined in subdivision (a)(7).

c. Property purchased for use by the purchaser or for resale.

d. Production tooling—tooling produced and used for the manufacture of final production units.

(6) FUNCTIONAL USE. Use for which the property was designed which occurs after completion of the research and development. Custom-made items normally are intended for functional use and not for informational and testing use. Informational and testing use of a prototype by the contractor or its customer does not qualify as a functional use.

Examples of functional use include:

1. Use as test fixtures in manufacturing equipment.

2. Use as production tooling.

(7) INFORMATIONAL AND TESTING USE. Use by either the contractor or its customers including, but not limited to:

1. Testing for verification of a design to specifications.

2. Developing data, algorithms, ideas and/or knowledge to improve or perfect a design.

3. Determining alternative design features and implementations.

4. Validating testing of software and firmware embodied within a design.

5. Demonstrating operation of a design for approval by a customer.

6. Quality assurance and performance testing to determine limitations and failure modes of the design.

7. Determining or improving interfaces to other equipment during the design process.

8. Determining or improving the processes for manufacture of the design.

9. Testing to design failure.

10. Evaluating numerous prototypes for the acceptability of the design and the manufacturability of such design. Qualifying evaluation does not include any functional use of the property in a normal business operations capacity.

11. Testing prototypes to assure that the design works to the specifications desired.

(8) PHASED CONTRACTS. A phased contract is a contract which provides for separate phases wherein the purchaser has the specific right to terminate the contract prior to commencement of the next phase without the delivery of tangible personal property required to be delivered in any subsequent phase specified in the contract and without further obligation except for compensation for work completed or cancellation fees.

A contract for the design and manufacture of a custom-made item shall be considered a "phased contract" when:

1. the purchaser has the specific right to terminate the contract prior to or upon completion of the design phase, or

2. there are two separate contracts: one for the design service and the other for the manufacture of the custom-made item.

(b) APPLICATION OF TAX.

(1) GENERAL. Persons engaged in the business of rendering services pursuant to a qualified research and development contract are consumers of tangible personal property which they use incidentally in rendering the service. Tax applies to the sale of the property to them. Tax does not apply to receipts derived from qualified research and development contracts except as provided below.

(2) PROTOTYPES. Prototypes transferred in a qualified research and development contract for informational and testing purposes, as defined in subdivision (a)(7), are not subject to tax regardless of the fact the research contract may place a value on the prototype. Prototypes transferred are for verification that a design meets the required technical specifications of the contract. No functional use, as defined in subdivision (a)(6), of the prototypes is made. Either the sales tax or the use tax applies with respect to sales of such tangible personal property to the contractor.

Sales of additional prototypes transferred in a qualified research and development contract for purposes other than informational and testing use, where a functional use occurs, are subject to tax. This includes prototypes transferred for the purpose of testing the aesthetic features of the product by independent third parties for marketing purposes, or used for the purpose for which the property was designed. The measure of tax is the stated value for such property in the contract, or if none is stated, at the computed fair market value as determined by applying a factor of three to the cost of direct materials used in the production of the prototype.

Tax applies to the transfer of title or possession of prototype tooling, in a qualified research and development contract, for functional use as defined in subdivision (a)(6), regardless of the form of the media, even if a separate charge is not made for these properties. The measure of tax is the amount provided for in the contract for duplicate or replacement sets of the property, or if no such amount is provided, the measure of tax will be equal to fair market value as determined by applying a factor of three to the cost of direct materials used in the production of the prototype tooling.

(3) CUSTOM-MADE ITEMS. A contract to design, develop, and manufacture a custom-made item is a contract to sell tangible personal property. Generally, custom-made items are intended for functional use and not for informational and testing use. Unless the sale of the property is a sale for resale, tax applies to the gross receipts from the sale of the property. Gross receipts includes the entire amount of the contract price, including charges related to research, design, and development activities. Tax applies to the entire contract price without regard to the fact that the research, design, and development charges may be separately stated. See subdivision (b)(4) if the contract qualifies as a phased contract.

(4) PHASED CONTRACTS. The research and development phase and the production phase of a phased contract shall remain as two separate contracts and shall be taxed as such. Items produced for functional use in the production phase of the contract shall be subject to tax unless the purchaser provides the contractor with a resale certificate or the transfer is otherwise exempt.

(5) APPLICATION TO SEMICONDUCTOR INDUSTRY. Production tooling, including a mask to be used in production, is a custom-made item and tax applies as outlined in subdivision (b)(3) or (b)(4) as applicable.

Pattern generation tapes, wafer probe test tapes, final test tapes, schematic diagrams for the probe board, and schematic diagrams for the final test load board are informational items, if transferred for archival or other informational purposes not involving a functional use. The contractor is the consumer of the direct materials.

History: Adopted November 28, 1995, effective March 22, 1996.


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Regulation 1502. Computers, Programs, and Data Processing.

Reference: Sections 995.2, 6006, 6007, 6010, 6010.9, 6011, 6012, 6015, and 6016, Revenue and Taxation Code.

(a) IN GENERAL. "Automatic data processing services" are those rendered in performing all or part of a series of data processing operations through an interacting assembly of procedures, processes, methods, personnel, and computers.

Automatic data processing services may be provided by manufacturers of computers, data processing centers, systems designers, consultants, software companies, etc. In addition, there are banks and other businesses which own or lease computers and use them primarily for their own purposes but occasionally provide services to others. Businesses rendering automatic data processing services will be referred to herein as "data processing firms."

(b) DEFINITIONS OF TERMS.

(1) APPLICATION. The specific job performance by an automatic data processing installation. For example, data processing for a payroll may be referred to as a payroll application.

(2) CODING. The list, in computer code, of the successive computer instructions representing successive computer operations for solving a specific problem.

(3) COMPUTER. A computer is an electronic device (including word processing equipment and testing equipment) or combination of components, which is programmable and which includes a processor (central processing unit or microprocessor), internal memory, and input and output connections. Manufacturing equipment which incorporates a computer is a computer for purposes of this regulation. However, the term does not include manufacturing equipment which operates under the control of mechanical or electronic accessories, the attachment of the equipment of which is required for the machine to operate. An electronic device otherwise qualifying as a computer remains a computer even though it may be used for information processing, data acquisition, process control or for the control of manufacturing machinery or equipment.

(4) CUSTOM COMPUTER PROGRAM AND PROGRAMMING. A computer program prepared to the special order of the customer. A program prepared to the special order of the customer qualifies as a custom program even though it may incorporate preexisting routines, utilities or similar program components. It includes those services represented by separately stated charges for modifications to an existing prewritten program which are prepared to the special order of the customer.

(5) DATA ENTRY (INCLUDING ENCODING). Recording information in or on storage media by punching holes or inserting magnetic bits to represent letters, digits, and special characters.

(6) DIGITAL PRE-PRESS INSTRUCTION. The creation of original information in electronic form by combining more than one computer program into specific instructions or information necessary to prepare and link files for electronic transmission for output, within the printing industry, to film, plate, or direct to press, which is then transferred on electronic media such as tape or compact disc.

(7) INPUT. The information or data transferred, or to be transferred, from storage media into the internal storage of the computer.

(8) OUTPUT. The information transferred from the internal storage of the computer to storage media or tabulated listing.

(9) PREWRITTEN PROGRAM. A program held or existing for general or repeated sale or lease. The term also includes a program developed for in-house use which is subsequently offered for sale or lease as a product.

(10) PROGRAM. "Program" is the complete plan for the solution of a problem, i.e., the complete sequence of automatic data processing equipment instructions necessary to solve a problem, and includes both systems and application programs and subdivisions thereof. "Subdivision" includes, without limitation, assemblers, compilers, generators, procedures, functions, routines, and utility programs. "Problem" means and includes any problem that may be addressed or resolved by a program or subdivision; and the "problem" addressed need not constitute the full array of a purchaser's or user's problems, requirements, and desired features. "Problem" further includes, without limitation, any problem associated with: information processing; the manipulation or storage of data; the input or output of data; the transfer of data or programs, including subdivisions; the translation of programs, including subdivisions, into machine code; defining procedures, functions, or routines; executing programs or subdivisions that may be invoked within a program; and the control of equipment, mechanisms, or special purpose hardware.

(11) PROOF LISTING. A tabulated listing of input.

(12) SOURCE DOCUMENTS. A document supplied by a customer of a data processing firm from which basic data are extracted (e.g., sales invoice).

(13) STORAGE MEDIA. Includes hard disks, floppy disks, diskettes, magnetic tape, cards, paper tape, drums and other devices upon which information is recorded.

(c) BASIC APPLICATIONS OF TAX.

(1) The transfer of title, for a consideration, of tangible personal property, including property on which or into which information has been recorded or incorporated, is a sale subject to tax.

(2) Charges for producing, fabricating, processing, printing, imprinting or otherwise physically altering, modifying or treating consumer-furnished tangible personal property (cards, tapes, disks, etc.), including charges for recording or otherwise incorporating information on or into such tangible personal property, are generally subject to tax.

(3) A transfer for a consideration of the title or possession of tangible personal property which has been produced, fabricated, or printed to the special order of the customer, including property on which or into which information has been recorded or incorporated, is generally a sale subject to tax. However, if the contract is for the service of researching and developing original information for a customer, tax does not apply to the charges for the service. The tangible personal property used to transmit the original information is merely incidental to the service.

(4) Charges for the transfer of computer-generated output are subject to tax where the true object of the contract is the output and not the services rendered in producing the output. Examples include artwork, graphics, and designs. However, the transfer by the seller of the original information created by digital pre-press instruction is not subject to tax if the original information is a custom computer program as explained in subdivision (f)(2)(F).

(5) Charges for processing customer-furnished information (sales data, payroll data, etc.) are generally not subject to tax. (For explanation and specific application of tax, see subdivision (d).)

(6) Leases of tangible personal property may be subject to tax under certain conditions. (See Regulation 1660 for application of tax to leases.)

(7) Charges made for the use of a computer, on a time-sharing basis, where access to the computer is by means of remote telecommunication are not subject to tax. (See subdivision (i).)

(8) Generally data processing firms are consumers of all tangible personal property, including cards and forms, which they use in providing nontaxable services unless a separate charge is made to customers for the materials, in which case tax applies to the charge made for the materials.

(d) MANIPULATION OF CUSTOMER-FURNISHED INFORMATION AS SALE OR SERVICE.

(1) GENERAL. Generally tax applies to the conversion of customer-furnished data from one physical form of recordation to another physical form of recordation. However, if the contract is for the service of developing original information from customer-furnished data, tax does not apply to the charges for the service. The tangible personal property used to transmit the original information is merely incidental to the service.

(2) DATA ENTRY AND VERIFICATION. This covers situations where a data processing firm's agreement provides only for data entry, data verification, and proof listing of data, or any combination of these operations. It does not include contracts under which these services are performed as steps in processing of customer-furnished information as discussed under subdivision (d)(5).

Agreements providing solely for data entry and verification, or data entry, providing a proof list and/or verifying of data are regarded as contracts for the fabrication of storage media and sales of proof lists. Charges therefor are taxable, whether the storage media are furnished by the customer or by the data processing firm.

Tax also applies to charges for the imprinting of characters on a document to be used as the input medium in an optical character recognition system. The tax application is the same regardless of which type of storage media is used in the operation.

(3) ADDRESSING (INCLUDING LABELS) FOR MAILING. Where the data processing firm addresses, through the use of its computer or otherwise, material to be mailed, with names and addresses furnished by the customer or maintained by the data processing firm for the customer, tax does not apply to the charge for addressing. Similarly, where the data processing firm prepares, through the use of its computer or otherwise, labels to be affixed to material to be mailed, with names and addresses furnished by the customer or maintained by the data processing firm for the customer, tax does not apply to the charge for producing the labels, whether or not the data processing firm itself affixes the labels to the material to be mailed. (For the sale of mailing list by the proprietor of such list, as a sale of tangible personal property or as a non-taxable addressing, see Regulation 1504 "Mailing Services.")

(4) MICROFILMING AND PHOTORECORDING. Tax applies to charges for microfilming or photorecording except, as provided in subdivision (d)(5), where the microfilming or photorecording is done under a contract for the processing of customer-furnished information. Tax applies to a contract where data on magnetic tape are converted into combinations of alphanumeric printing, curve plotting and/or line drawings, and put on microfilm or photorecording paper.

(5) PROCESSING OF CUSTOMER-FURNISHED INFORMATION.

(A) "Processing of customer-furnished information" means the developing of original information from data furnished by the customer. Examples of automatic data processing processes which result in original information are summarizing, computing, extracting, sorting, and sequencing. Such processes also include the updating of a continuous file of information maintained by the customer with the data processing firm.

(B) "Processing of customer-furnished information" does not include: (1) an agreement providing solely for the reformatting of data or for the preparation of a proof listing or the performance of an edit routine or other pre-processing, (2) the using of a computer as a mere printing instrument, as in the preparation of personalized computer-printed letters, (3) the mere converting of data from one medium to another, (4) an agreement under which a person undertakes to prepare artwork, drawings, illustrations or other graphic material unless the provisions of subdivision (f)(2)(F) apply regarding digital pre-press instruction and custom computer programs. Additionally, graphic material furnished incidentally to the performance of a service is not subject to tax. For example, graphics furnished in connection with the performance of architectural, engineering, accounting, or similar professional services are not subject to tax. With respect to typography, clip art, combined with text on the same page is considered composed type as explained in Regulation 1541.

(C) Contracts for the processing of customer-furnished information usually provide that the data processing firm will receive the customer's source documents, record data on storage media, make necessary corrections, process the information, and then record and transfer the output to the customer.

Where a data processing firm enters into a contract for the processing of customer-furnished information, the transfer of the original information to the customer is considered to be the rendering of a service. Except as described in subdivisions (c)(8) and (d)(5)(E), tax does not apply to the charges made under contracts providing for the transfer of the original information whether the original information is transferred on storage media, microfilm, microfiche, photorecording paper, input media for an optical character recognition system, punched cards, preprinted forms, or tabulated listing. The breakdown of the total charge into separate charges for each operation involved in processing the customer-furnished information will not change the application of tax.

(D) The furnishing of computer programs and data by the customer for processing under direction and control of the data processing firm will not alter the application of tax, notwithstanding that charges are based on computer time.

(E) Taxable Items. Where a data processing firm has entered into a contract which is regarded as a service contract under subdivision (d)(5)(C) and the data processing firm, pursuant to the contract, transfers to its customer tangible property other than property containing the original information, such as: duplicate copies of storage media; inventory control cards for use by the customer; membership cards for distribution by the customer; labels (other than address labels); microfiche duplicates; or similar items for use, tax applies to the charges made for such items. If no separate charge is made, tax applies to that portion of the charge made by the data processing firm which the cost of the additional computer time (if any), cost of materials, and labor cost to produce the items bear to the total job cost.

(F) Additional Copies. When additional copies of records, reports, tabulation, etc., are provided, tax applies to the charges made for the additional copies. "Additional copies" are all copies (other than carbon copies), whether the copies are prepared by rerunning the same program, by using multiple simultaneous printers, by looping a program such that the program is run continuously, by using different programs to produce the same output product, or by other means. Where additional copies are prepared the tax will be measured by the charge made by the data processing firm to the customer. If no separate charge is made for the additional copies, tax applies to that portion of the gross receipts which the cost of the additional computer time (if any), the cost of materials and labor cost to produce the additional copies bear to the total job cost. Charges for copies produced by means of photocopying, multi-lithing, or by other means are subject to tax.

(e) TRAINING SERVICES AND MATERIALS. Data processing firms provide a number of training services, such as data entry and verification, programming and specialized training in systems design.

(1) Charges for training services are nontaxable, except as provided in subdivision (g) where the training services are provided as part of the sale of tangible personal property. The data processing firm is the consumer of tangible personal property which is used in training others, or provided to trainees without a separate charge as a part of the training services.

(2) Tax applies to charges for training materials, including books, furnished to trainees for a charge separate from the charge for training services.

(3) Where a person sells tangible personal property, such as computers or programs, and provides training materials to the customer without making an additional charge for the training materials, this is a sale of the training materials. The selling price of the training materials is considered to be included in the sales price of the tangible personal property.

(f) COMPUTER PROGRAMS.

(1) PREWRITTEN (CANNED) PROGRAMS. Prewritten programs may be transferred to the customer in the form of storage media or by listing the program instructions on coding sheets. In some cases they are usable as written; however, in other cases it is necessary that the program be modified, adapted, and tested to meet the customer's particular needs. Tax applies to the sale or lease of the storage media or coding sheets on which or into which such prewritten (canned) programs have been recorded, coded, or punched.

(A) Tax applies whether title to the storage media on which the program is recorded, coded, or punched passes to the customer, or the program is recorded, coded, or punched on storage media furnished by the customer. The temporary transfer of possession of a program, for a consideration, for the purpose of direct use or to be recorded or punched by the customer, or by the lessor on the customer's premises, is a lease of tangible personal property. The tax applies unless the property is leased in substantially the same form as acquired by the lessor and the lessor has paid sales tax reimbursement or use tax with respect to the property.

(B) Tax applies to the entire amount charged to the customer. Where the consideration consists of license fees, all license fees, including site licensing and other end users fees, are includable in the measure of tax. Tax does not apply, however, to license fees or royalty payments that are made for the right to reproduce or copy a program to which a federal copyright attaches in order for the program to be published and distributed for a consideration to third parties, even if a tangible copy of the program is transferred concurrently with the granting of such right. Any storage media used to transmit the program is merely incidental.

(C) Maintenance contracts sold in connection with the sale or lease of prewritten computer programs generally provide that the purchaser will be entitled to receive, during the contract period, storage media on which prewritten program improvements or error corrections have been recorded. The maintenance contract also may provide that the purchaser will be entitled to receive, during the contract period, telephone or on-site consultation services.

If the purchase of the maintenance contract is not optional with the purchaser, that is, if the purchaser must purchase the maintenance contract in order to purchase or lease a prewritten computer program, then the charges for the maintenance contract are taxable as part of the sale or lease of the prewritten program. Tax applies to any charge for consultation services provided in connection with a maintenance contract except as provided below.

For reporting periods commencing on or after January 1, 2003, if the purchase of the maintenance contract is optional with the purchaser, that is, if the purchaser may purchase the prewritten software without also purchasing the maintenance contract, and there is a single lump sum charge for the maintenance contract, 50 percent of the lump sum charge for the maintenance contract is for the sale of tangible personal property and tax applies to that amount; the remaining 50 percent of the lump sum charge is nontaxable charges for repair.

If no tangible personal property whatsoever is transferred to the customer during the period of the maintenance contract, tax does not apply to any portion of the charge. Tax does not apply to a separately stated charge for consultation services if the purchaser is not required to purchase those services in order to purchase or lease any tangible personal property, such as a prewritten computer program or a maintenance contract.

(D) The sale or lease of a prewritten program is not a taxable transaction if the program is transferred by remote telecommunications from the seller's place of business, to or through the purchaser's computer and the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction. Likewise, the sale of a prewritten program is not a taxable transaction if the program is installed by the seller on the customer's computer except when the seller transfers title to or possession of storage media or the installation of the program is a part of the sale of the computer.

If the transfer of a prewritten program is a nontaxable transaction, then the seller is the consumer of tangible personal property used to produce written documentation or manuals (including documentation or manuals in machine-readable form) designed to facilitate the use of the program and transferred to the purchaser for no additional charge. If a separate charge is made for the documentation or manuals, then tax applies to the separate charge.

(E) The transfer of a prewritten program on storage media is not a sale for resale when the storage media, or an exact copy, will be used to produce additional copies of the program.

Charges for testing a prewritten program on the purchaser's computer to insure that such a program operates as required are installation charges and are nontaxable.

(2) CUSTOM PROGRAMS.

(A) Tax does not apply to the sale or lease of a custom computer program, other than a basic operational program, regardless of the form in which the program is transferred. Nor does the tax apply to the transfer of a custom program, or custom programming services performed, in connection with the sale or lease of computer equipment, whether or not the charges for the custom program or programming are separately stated.

(B) However, charges for custom modifications to prewritten programs are nontaxable only if the charges for the modifications are separately stated. Otherwise, the charges are taxable as part of the sale of the prewritten program.

When the charges for modification of a prewritten program are not separately stated, tax applies to the entire charge made to the customer for the modified program unless the modification is so significant that the new program qualifies as a custom program. If the prewritten program was previously marketed, the new program will qualify as a custom program, if the price of the prewritten program was 50 percent or less of the price of the new program. If the prewritten program was not previously marketed, the new program will qualify as a custom program if the charge made to the customer for custom programming services, as evidenced in the records of the seller, is more than 50 percent of the contract price to the customer.

(C) Charges for any written documentation or manuals designed to facilitate the use of a custom computer program by the customer are nontaxable, whether separately stated or not. The vendor of the custom computer program is the consumer of the written documentation or manuals, or of any tangible personal property used by the vendor in producing the written documentation or manuals.

(D) A custom computer program includes a program prepared to the special order of a customer who will use the program to produce and sell or lease copies of the program, and the charge for such custom computer program is not subject to tax. Sales or leases of the copies, however, are taxable as sales of prewritten computer programs.

(E) A computer program prepared to the special order of a customer to operate for the first time in connection with a particular basic operating system is a custom computer program even though a different version currently operates in connection with an incompatible basic operating system.

(F) Digital pre-press instruction is a custom computer program under section 6010.9 of the Revenue and Taxation Code, the sale of which is not subject to tax, provided the digital pre-press instruction is prepared to the special order of the purchaser. Digital pre-press instruction shall not, however, be regarded as a custom computer program if it is a "canned" or prewritten computer program which is held or existing for general or repeated sale or lease, even if the digital pre-press instruction was initially developed on a custom basis or for in-house use. The sale of such canned or prewritten digital pre-press instruction in tangible form is a sale of tangible personal property, the retail sale of which is subject to tax.

(g) SERVICE CHARGES. The following activities are service activities. Charges for the performance of such services are nontaxable unless the services are performed as a part of the sale of tangible personal property.

(1) Designing and implementing computer systems (e.g., determining equipment and personnel required and how they will be utilized).

(2) Designing storage and data retrieval systems (e.g., determining what data communications and high-speed input-output terminals are required).

(3) Consulting services (e.g., study of all or part of a data processing system).

(4) Feasibility studies (e.g., studies to determine what benefits would be derived if procedures were automated).

(5) Evaluation of bids (e.g., studies to determine which manufacturer's proposal for computer equipment would be most beneficial).

(6) Providing technical help, analysts, and programmers, usually on an hourly basis.

(7) Training Services.

(8) Maintenance of equipment. (See Regulation 1546 for application of tax to maintenance contracts.)

(9) Consultation as to use of equipment.

(h) PICK-UP AND DELIVERY CHARGES. If the data processing firm's billing is for nontaxable processing of customer-furnished information, the tax will not apply to pick-up and delivery charges. If pick-up and delivery charges are made in conjunction with the sale of tangible personal property or the processing of customer-furnished tangible personal property, the tax will apply to the pick-up charges. Tax will apply to the delivery charges to the extent specified in Regulation 1628, "Transportation Charges."

(i) RENTAL OF COMPUTERS. A lease includes a contract by which a person secures for a consideration the use of a computer which is not on his or her premises, if the person or his or her employees, while on the premises where the computer is located operate the computer, or direct and control its operation. A lease does not include a contract whereby a person secures access by means of remote telecommunication to a computer which is not on his or her premises, if the person or his or her employees operate the computer or direct and control its operation by means of remote telecommunication. (See Regulation 1660 for application of tax to leases.)

History: Adopted February 17, 1972, effective March 25, 1972.

Amended November 18, 1987, effective March 4, 1988. In subdivision (b), amended the regulation to conform several definitions with industry standards. In subdivision (c), amended the regulation to make clear and specific the basic application of tax. In subdivision (f), amended the regulation to make clear and specific the application of tax to prewritten computer programs.

Amended June 24, 1998, effective January 29, 1999. Subdivision (b) amended to delete last sentence and add new second sentence. Subdivision (f)(1)(D) amended to add new last sentence of first paragraph.

Amended September 1, 1999, effective December 3, 1999. Subdivision (b)—definition "Electronic or Pre-Press instruction" added. Language added to subdivision (c)(4) and to (d)(5)(B)(4) emphasizing that only the sale of digital pre-press instructions that qualify as custom computer programs may be non-taxable. Also added to the last sentence in subdivision (d)(5)(B), language to harmonize Regulation 1502 with a simultaneous change to Regulation 1541 concerning customer furnished information; also added an example that with respect to typography, clip art and text combined on the same page is considered composed type. New subdivision (f)(2)(F) added.

Amended September 11, 2002, operative January 1, 2003. Word "paragraph" changed to "subdivision" throughout. Word "subdivision" added before, and words "above" and "below" deleted after, subdivision numbers in cross references. Word "section" deleted throughout. Word "exempt" replaced with "nontaxable" throughout. Subdivision (b)—list reformatted as separate subdivisions (1)–(F13); titles in all new subdivisions capitalized; substance of former un-numbered paragraph, regarding electronic or digital pre-press instructions, transferred to new subdivision (b)(6) and re-written to conform to recent amendments to Regulations 1540 and 1541 in this area with title "Electronic or Digital Pre-Press Instruction" changed to "DIGITAL PRE-PRESS INSTRUCTION" and words "electronic or" deleted throughout accordingly; definitions for "Keystroke," "Off-line," and "On-line," deleted; cross-reference to subdivision (d)(5) deleted. Subdivision (d)(3)—word "regardless" deleted and words "or not", "For the S", and "the" added. Subdivision (d)(5)—subdivision (C)—"rendition" replaced with "rendering." Subdivision (f)(1)(C)—in first un-numbered paragraph, phrase "that . . . program" and new second sentence added and phrase "including . . . services" deleted. Second un-numbered paragraph replaced with new second and third un-numbered paragraphs. Subdivision (f)(2)(B)—word "services" deleted for clarity, and "%" replaced with "percent." Subdivision (f)(2)(C)—"Any" replaced with "Charges for any"; words "separately stated" added and phrase "a . . . manuals" deleted. Subdivision (f)(2)(D)—phrase "and . . . tax" added to first sentence; "The" replaced with "Sales or leases of the" and words "sales of" added to second sentence, and third sentence deleted. Subdivision (f)(2)(F)—current language replaced with new language to conform the definition of digitized pre-press instructions to that promulgated in recent amendments to Regulations 1540 and 1541. Subdivision (g)—gender-neutral language added.

Amended March 16, 2009, effective June 11, 2009. Amended subdivision (b)(10) to clarify the definition of "program."


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Regulation 1502.1. Word Processing.

Reference: Sections 6006, 6010, 6011, 6012, 6015, and 6016, Revenue and Taxation Code.

(a) GENERAL.

Tax does not apply to charges for furnishing original letters or documents, or carbon copies produced simultaneously with the original, prepared by using a typewriter or word processing equipment. Where the word processing company provides only an original letter or document, or carbon copies produced simultaneously with the original, the true object of the contract is the performance of a service and not the furnishing of tangible personal property. The word processing company is the consumer of tangible personal property used in providing the service.

Tax applies to charges for producing multiple copies of letters, manuscripts, or other documents using word processing equipment. Multiple copies include form letters produced with a slight variation which personalizes essentially the same letter. Tax applies to the entire charge without deduction for charges for setting up the machine, keyboarding, or assembling the material. Charges for providing additional copies are subject to tax regardless of whether the original was prepared using a typewriter or word processing equipment and regardless of whether the copies are produced by computers, word processors, copying machines, or other methods.

Tax does not apply to charges made by a word processing company for keyboarding original names and addresses, setting up and sorting, and for printing the names and addresses onto mailing labels. (See Regulation 1504 for an explanation of how tax applies to mailing services).

Tax does not apply to charges made when a word processor is used to produce copy which is acquired and used exclusively for reproduction purposes since Revenue and Taxation Code section 6010.3 excludes typography from the definition of sale or purchase.

(b) EXAMPLES OF THE APPLICATION OF TAX UNDER SPECIFIC CIRCUMSTANCES.

(1) PREPARATION OF STANDARD LETTERS AND ENVELOPES FOR MAILING. A word processing operator keyboards and records an address list and standard letter on magnetic media. The letter is then automatically typed to each person on the address list. The prerecorded address list is then used to address envelopes inserted into the machine. The charges made for setting up the machine, keyboarding the material and typing out the letters are taxable. The charges made for addressing the envelopes are nontaxable if separately stated (See Regulation 1504).

(2) MANUSCRIPTS. An author brings a manuscript to a word processing company. The operator keyboards the material and records it on magnetic media. A draft copy of each page of the recorded material is printed out (typed automatically) and given to the author to proof-read. The author makes corrections and changes on the draft and returns it to the operator. The operator makes the necessary changes using a word processor. A final copy is then printed out for the author to submit to a publisher. The charges made for the original keyboarding of the manuscript, printing out the draft copy, editing, and printing out a final copy are nontaxable. Tax does not apply to charges for carbon copies prepared at the same time as the original copy; however charges for photocopies are taxable.

(3) ASSEMBLING FINAL PRODUCT FROM A PARAGRAPH LIBRARY.An attorney brings several paragraphs to a word processing company which uses word processing equipment to keyboard and record the paragraphs on magnetic media to form a "paragraph library." The attorney then notifies the company to select certain stock paragraphs, for example paragraphs 1, 8, 11, 29, 16, 12, 87, 100, 56, and 57 in that order, to create a will for his client. The attorney provides variable information to be inserted into proper position in the paragraphs, such as: make of the will, maker's spouse, maker's children and their date of birth, city and county of residence. The operator instructs the machine (with keyboard commands) to assemble those specified paragraphs with the necessary variable client information and to print out (automatically type) a will. All of the charges made for keyboarding original paragraphs, printing out a draft of all paragraphs for the attorney's use, assembling the paragraphs as requested, and printing out individual wills (and any carbon copies of the original) are nontaxable. Charges for photocopies are taxable.

(4) ADDRESSING MAILING LABELS. A client has a list of 2,000 names that he is going to use monthly for a mailing. Every month the list has to be sorted into zip code sequence, typed on labels to be applied to envelopes which are then mailed. The word processing company keyboards the names and addresses and records them on magnetic media. The machine is instructed (using keyboard commands) to sort the names into correct zip code sequence before the list is finally stored on the magnetic media. Each month the equipment is set up and, with an operator in attendance (giving keyboard commands), the names are printed (automatically typed) onto continuous form labels. The charges made by the word processing company for keyboarding original names and addresses, for setting up and sorting, and for the monthly setting up and printing of names onto labels are all nontaxable charges for addressing.

History: Adopted August 1, 1984, effective June 8, 1985.


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Regulation 1503. Hospitals and other Medical Service Facilities, Institutions and Homes for the Care of Persons.

Reference: Sections 6006, 6007, 6015, 6016, 6051, 6359, and 6363.6, Revenue and Taxation Code.

(a) MEALS.

(1) There are exempt from sales and use tax the sale of meals and food products to and the use of meals and food products by the following institutions when furnished or served to and consumed by their residents or patients:

(A) A health facility as defined in Section 1250 of the Health and Safety Code, which holds the license required pursuant to Section 1253, or is exempt from the license requirement pursuant to subdivision (a) of Section 1270, or is operated by the United States.

(B) A community care facility as defined in Section 1502 of the Health and Safety Code, which holds the license required by Section 1508, or is a residential facility selected by a licensee pursuant to Section 1506 and exclusively used for the reception and care of persons placed by such licensee, or is exempt from the license requirement pursuant to subdivision (f) of Section 1505, or is operated by the United States.

(C) A residential care facility for the elderly, as defined in Section 1569.2 of the Health and Safety Code, that holds the license required by Section 1569.10 of the Health and Safety Code or is exempt from the license requirements pursuant to Section 1569.145 of the Health and Safety Code, or is operated by the United States.

(D) Any house, retirement home or similar establishment supplying board and room for a flat monthly rate and serving as a principal residence exclusively for persons 62 years of age or older, and any housing that primarily serves older persons and that is financed by state or federal programs. For purposes of this regulation, the term "exclusively" is defined to mean that no more than four persons under 62 years of age are in residence during any calendar quarter.

(E) An alcoholism or drug abuse recovery or treatment facility, as defined in Section 11834.02 of the Health and Safety Code, which holds the license required by Section 11834.30 of the Health and Safety Code.

(2) "Meals," for purposes of this subdivision, include any of the following:

(A) Carbonated beverages furnished or served as part of the meals.

(B) Food provided to the patient or resident by way of enteral feeding, Total Parenteral Nutrition (also called TPN), and Intradialytic Parenteral Nutrition (also called IDPN), as each is defined in Regulation 1591, provided these forms of nutrition are furnished or served to and consumed by a resident or patient of an institution specified in this subdivision (a).

(C) Nonreusable items that become components of the meals. These include straws, paper napkins, and plastic eating utensils. These also include bags and tubing, as well as filters, locks, tape, clamps, and connectors which are integral to the tubing, each of which is used to dispense enteral feeding as meals to the patient or resident including: gastrostomy tubes (also called G tubes) which are used to deliver the nutrition directly into the stomach; jejunostomy tubes (also called J tubes) which are used to deliver the nutrition directly into the intestinal tract; and nasogastric tubes (also called NG tubes) which are used to deliver the nutrition directly through the nasal passage to the stomach. Needles, syringes, cannulas, bags, and tubing, as well as filters, locks, tape, clamps, and connectors which are integral to the tubing, used to dispense TPN or IDPN as meals to the patient or resident are also regarded as components of those meals provided each of these items is used primarily to dispense the TPN or IDPN.

(b) GENERAL.

(1) SALES TO MEDICAL SERVICE FACILITIES. "Medical service facilities" for purposes of this subdivision are those institutions specified in subdivision (a) of this regulation as well as surgery centers and similar medical service facilities whether patients are accepted for periods of less than or more than twenty-four hours. For example, dialysis centers, AIDS centers, and cancer centers are medical service facilities. Operative April 1, 2001, except as provided in subdivision (b)(2) of this regulation, medical service facilities are service providers to their patients and residents and are the consumers of tangible personal property furnished in connection with those services, whether separately itemizing charges for the services and for the tangible personal property or billing in lump sum, and sales of that tangible personal property to the medical service facilities are taxable retail sales unless specifically exempted.

(2) SALES BY MEDICAL SERVICE FACILITIES. When a medical service facility is the retailer of property furnished, tax applies to its charge for that property unless the sale is exempt from tax. A medical service facility is the retailer of property furnished for a charge to persons other than residents and patients.

A medical service facility is the retailer of tangible personal property for which it makes a separately itemized charge if the property is furnished to a patient or resident with the intent that the patient or resident remove the property from the premises of the medical service facility for use by the patient or resident. Examples of such items include crutches or a wheelchair provided upon release from the medical service facility and discharge kits for new mothers (which might include formula, diapers, etc.). Notwithstanding subdivision (b)(1) of this regulation, a medical service facility is the retailer of any property furnished in connection with its medical services if its contract with the medical service facility's resident or patient or other customer specifically provides that title to the subject tangible personal property passes to the resident or patient or other customer. When the contract has a provision passing title to the subject tangible personal property to the resident or patient or other customer, the medical services facility may purchase such property for resale, and tax applies to the charge by the medical services facility unless its sale is otherwise exempt from tax.

(3) LABORATORY CHARGES. Laboratory charges, such as charges for blood-counts, are not taxable. Tax does not apply with respect to purchases, sales or donations of whole blood or blood plasma for use in transfusions.

History: Amended January 9, 1963.

Amended September 18, 1963.

Amended June 20, 1967.

Amended October 8, 1968, applicable on and after October 1, 1968.

Amended and renumbered March 24, 1970, effective April 29, 1970.

Amended December 15, 1971, applicable on and after December 15, 1971.

Amended February 16, 1972, effective March 25, 1972.

Amended May 10, 1972, effective June 18, 1972.

Amended February 20, 1974, effective March 28, 1974.

Amended October 8, 1974, effective October 10, 1974. Changed definition of "institution" and added appendix of all Health and Safety Code sections used in new definition.

Amended December 7, 1978, effective February 18, 1979. Subsection (b)(2) amended to create the presumption that if an institution adds sales tax to any charges it will be presumed that the institution has made a retail sale; "special hospital" and "residential care facilities for the elderly" are defined in the Appendix; the terms "health facility" and "community care facility" have been slightly expanded to reflect changes in the Health and Safety Code.

Amended November 15, 1979, effective January 5, 1980. Added (a)(3); in (b)(1) substituted "residents" for "inmates"; in (b)(2) substituted "residents" for "inmates" and deleted reference to charges for administration of property.

Amended April 1, 1981, effective August 19, 1981. Repealed the Appendix.

Amended June 2, 1988, effective August 14, 1988. In subdivision (a)(4), included alcohol recovery facility as defined in the definition of "institution".

Amended August 1, 1989, effective October 15, 1989. Subdivision (a)(3) amended to exclude from the definition of "institution" any retirement home which has more than four persons under 62 years of age in residence during any calendar quarter. Subdivision (b)(2) amended to add that sales of meals and food products by an institution to persons other than residents or patients of that institution are subject to the tax.

Amended May 1, 1990, effective July 13, 1990. Paragraph (a)(4) was amended to conform the regulation to the statute, amended by Senate Bill 990, Chapter 919, Statutes of 1989, to provide that drug abuse recovery or treatment facilities as defined in the Health and Safety Code are included in the definition of "institution".

Amended August 1, 1991, effective August 30, 1991. Amended pursuant to Chapter 85, Statutes of 1991, and Chapter 88, Statutes of 1991, to exclude specified snack foods from the definition of food products and to clarify that snack foods are considered components of meals and food products served to residents or patients of certain institutions which may be purchased by the institutions for resale.

Amended July 28, 1993, effective November 3, 1993. Amended subdivision (b)(1) to remove reference to snack foods as an example of a normally taxable item which may be purchased for resale as a component of a meal.

Amended June 20, 1995, effective July 20, 1995. New subdivision (a)(3) added and previous subdivision (a)(3) amended and renumbered to (a)(4) as provided in Statutes of 1994, Chapter 702.

Amended February 15, 2001, effective June 1, 2001. Subdivision (a)(1) replaced with "There . . . patients;" former subdivisions (a)(1)–(5) are redesignated (a)(1)(A–E). New subdivision (a)(2) added to include enteral feeding, TPN and IDPN in the definition of meals for purposes of this subdivision. Subdivision (b) retitled "General." Subdivision (b)(1)—current title changed to "Sales to Medical Service Facilities," existing language deleted, language "medical service facilities . . . exempted" added to provide that medical service facilities are consumers of property furnished in connection with their services. Subdivision (b)(2)—current title changed to "Sales by Medical Service Facilities;" existing language deleted; new language "When . . . patients" and new unnumbered paragraph added to specify when a medical service facility is the retailer of property furnished.


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Regulation 1504. Mailing Lists and Services.

Reference: Sections 6006, 6006.3, 6009, 6012, 6015, 6016, and 6379.8, Revenue and Taxation Code.

(a) TRANSACTIONS IN MAILING LISTS.

(1) DEFINITION. A "mailing list" as used herein means a written or printed list, series, set, group, aggregation, etc., of names and addresses of, and occasionally, other information concerning persons, such as potential customers or donors, which is intended for use in circulating material by mail. Such a list may be in the form of a manuscript list, directory, Cheshire tape, Dick tape, gummed labels, index cards, or other similar means of communication. Operative January 1, 1994, "mailing list" includes a magnetic tape or similar device used to produce written or printed names and addresses by electronic or mechanical means.

(2) APPLICATION OF TAX GENERALLY. Except as otherwise provided in (a)(3) below, tax applies to receipts from the transfer of title or possession, rental or granting of a license for use of mailing lists, to the same extent as to receipts from sales or rentals of tangible personal property generally.

(3) LIMITED USE. Tax does not apply to charges for the transfer or use of mailing lists, where a contract restricts the transferee or user to use of the mailing list one time only. The charges in such cases are considered to be for information or addressing services.

(4) MAGNETIC TAPES. Where the names and addresses are recorded on magnetic tapes or similar devices used to produce written or printed names and addresses by electronic or mechanical means, charges for the transfer or use of the tape or similar device are subject to tax to the same extent as receipts from sales or rentals of tangible personal property generally regardless of any contractual restrictions on the frequency of use. Operative January 1, 1994, such magnetic tapes or similar devices are considered a mailing list and charges for their transfer and use under (a)(3) above are exempt from tax.

(5) APPLICATION OF TAX TO MATERIALS USED. Persons engaged in the business of selling, renting or licensing mailing lists are consumers of tangible personal property used in producing lists the transfer of which is not subject to tax, and tax applies to the sale to them of such property. Tangible personal property which becomes a component part of lists, the transfer of which is taxable may be purchased for resale.

(b)MAILING SERVICES.

(1) GENERAL. Tax does not apply to charges for services rendered in preparing material for mailing, such as addressing, enclosing, sealing, collating, affixing labels, blocking out, tucking or clasping envelope flaps, metering, affixing stamps, edging seal or edging with stamp, addressing permit indicia, and sorting, tying and sacking in compliance with postal rules and regulations, nor to charges for the handling or wrapping of material left over after preparation of material for mailing, which is to be returned to the customer.

(2) ADDRESSING DEFINED. "Addressing" means the actual writing, typewriting, printing, imprinting or affixing of names and addresses or addresses only on property to be mailed. The mailing may be done by the person doing the addressing or by another person. The process may include the preparation of

Cheshire tapes, Dick tapes, cards, gummed labels, etc., to be affixed to, or enclosed in, the property so as to serve as addresses for that property and not to be used for any other purpose such as reproduction or reference.

(3) CONSUMERS OF MATERIALS. Persons engaged in the business of providing mailing services are consumers of materials used in performing those services.

(c) PRINTING RELATED TO MAILING.

(1) SALES OF PRINTED MATTER. Tax applies to charges for printed matter furnished to a customer by a person engaged in the business of providing mailing services to the same extent as to charges for printed matter generally, even though the printed matter is to be mailed. If such matter is printed by another person, it may be purchased for resale by giving a resale certificate. If the mailing service has reimbursed its vendor for tax which the vendor is required to pay to the state or has paid use tax with respect to the purchase of such matter, a "tax-paid purchases resold" deduction will be allowed.

(2) SEPARATE STATEMENT OF PRINTING CHARGES. Charges for printed matter should be separately stated on the invoice to the customer. If not separately stated, the amount subject to tax will be determined by the board based on information available to it.

History: Adopted April 22, 1966.

Amended and renumbered February 17, 1972, effective March 26, 1972.

Amended December 7, 1978, effective February 18, 1979. Revised subsection (c)(1) with regard to the allowance of a "tax-paid purchases resold" deduction; revised subsection (c)(2) to provide a procedure for when charges for printed matter are not separately stated on the invoice.

Amended February 8, 1995, effective July 12, 1995. Subparagraphs (a)(1) and (4) amended to provide that charges for the transfer or use of magnetic tapes or similar devices are exempt from tax where a contract restricts their use to one time only and to delete an obsolete effective date. Subparagraphs (a)(2) and (b)(1) amended to correct clerical errors.


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Regulation 1505. Morticians.

Reference: Sections 6015 and 6381, Revenue and Taxation Code.

(a) IN GENERAL.

(1) MORTICIANS AS RETAILERS. Morticians are retailers of caskets, boxes, vaults, and clothing. They also are retailers of any other tangible personal property furnished in connection with rendering their services if a separate charge is made for such property. Unless otherwise exempt, tax applies to the sales price of all tangible personal property sold by morticians.*

* On October 25, 1972, the board adopted an amendment to the regulation by which the 50 percent standard service reporting procedure in effect until October 18, 1970, and the 45 percent standard service reporting procedure in effect thereafter, are no longer allowable.

(2) MORTICIANS AS CONSUMERS. Morticians are consumers of acknowledgment cards, memorial folders, registration books, embalming fluid, cosmetics, eye caps, morgue supplies, car stickers, and prayer books which are furnished by them in connection with services they render unless a separate charge is made for such property. Tax applies to the sales price to the mortician of all tangible personal property consumed by him.

(b) APPLICATION OF TAX TO SPECIFIC TYPES OF TRANSACTIONS.

(1) SALES IN INTERSTATE OR FOREIGN COMMERCE. The sale of a casket and other tangible personal property by a mortician, which he delivers or ships to an out-of-state point pursuant to the agreement of sale, is regarded as a sale in interstate or foreign commerce and is exempt from the tax. The facts that the death of the deceased occurred in this state, that the contracting parties are residents of this state, and that services are held in this state prior to the shipment, are immaterial.

(2) SALES TO THE UNITED STATES. All or a portion of charges for funerals of veterans and other persons may be paid by the United States Veterans Administration or by the Social Security Administration. Effective August 1, 1973, the United States Veterans Administration will pay an interment allowance, up to $150, in addition to the regular funeral and burial allowance for veterans. Morticians may take a deduction for sales to the United States Government when claims filed by them with federal agencies are paid directly to the morticians regardless of method of billing. If funeral charges are paid by another person, there is no tax exemption even though such person may receive reimbursement from a federal agency and even though the amount received as reimbursement is assigned or endorsed over to the mortician as a credit against those charges.

In computing the allowable exemption, the funeral allowance and the interment allowance must be treated separately.

(A) Funeral allowance payments received directly from a federal agency are to be prorated between funeral charges for sales of tangible personal property and charges for exempt services. None are to be allocated to accommodation cash advances. The only exception will be when a portion of a payment is clearly identified as applying to something for which a mortician has made a specific charge.

(B) Payments received directly from the United States Veterans Administration which are identified as interment allowances are to be prorated between sales of tangible personal property used in actual interment and charges or advances for services in connection with the interment. The only exception will be when a portion of the payment is clearly identified as applying to something pertaining to interment for which the mortician has made a specific charge.

(3) EXAMPLES OF APPLICATION OF AMOUNTS RECEIVED BY MORTICIANS DIRECTLY FROM A FEDERAL AGENCY. (Examples are at 6 percent rate.)


Mortician's invoice to client:
Charges: Amount:
Services $400.00
Casket 355.00
Vault 200.00
Suit 45.00
Subtotal $1,000.00
Accommodation Cash Advances: Amount:
Cemetery Space and Opening $50.00
Clergy 25.00
Music 15.00
Subtotal $90.00
Total $1,090.00
Sales Tax (6% of $355, $200 & $45) 36.00
Total $1,126.00

Example 1. Funeral allowance only.

Cash received by the mortician directly from a federal agency as a funeral allowance, and not allocated by the United States Government to any specific portion of the above charges, was $300. No interment allowance was received.

Since $600 of the $1,000 charged the client (exclude the cash advances) was for tangible personal property, 60% of the amount received from the federal agency (60% of $300 equals $180) is considered a sale of such property to the United States Government and is exempt from sales tax.


Computation of Tax:
Total Charges $1,090.00
Less: Accommodation Advances
Exempt Services
Sale to United States
 
$90.00
400.00
180.00
670.00
Taxable Sale $420.00
Tax at 6% 25.20
Taxable Sale Including Tax $445.20

Example 2. Funeral allowance and interment allowance received by mortician.

Cash received by the mortician directly from a federal agency, and not allocated by the United States Government to any specific portion of the above charges, was $300 as a funeral allowance and $150 as an interment allowance.

Since the total charges by the mortician related to interment were $250 (vault $200 plus cemetery space and opening $50), and the charge for tangible personal property related to interment was $200 (vault), 80% of the amount received from the federal agency as an interment allowance (80% of $150 equals $120) is considered a sale of such property to the United States Government and is exempt from sales tax.

Since $400 (casket $355 and suit $45) of the $800 charged the client for the funeral (exclude the cash advances and the vault) was for tangible personal property, 50% of the amount received from the federal agency as a funeral allowance (50% of $300 equals $150) is considered a sale of such property to the United States Government and is exempt from sales tax.


Computation of Tax:
Total Charges $1,090.00
Less: Accommodation Advances
Exempt Services
Sale to United States Government ($120 plus $150)
 
$90.00
400.00
270.00
760.00
Taxable Sale $330.00
Tax at 6% 19.80
Taxable Sale Including Tax $349.80

(4) ACCOMMODATION CASH ADVANCES. Tax does not apply to accommodation cash advances for such items as cemetery charges, newspaper notices, railroad tickets, ministerial fees and flowers.

(5) TAX-PAID PURCHASES RESOLD. A mortician may claim a "tax-paid purchases resold" deduction if the mortician reimbursed the vendor for tax which the vendor is required to pay to the state or has paid use tax with respect to the property and has resold the property prior to making any use of it.

(c) "PRE-NEED" AGREEMENTS. Where a mortician, cemetery association or other person enters into an agreement with a customer to provide services upon the death of the customer, no sale occurs for sales and use tax purposes until the services are rendered.

An amount designated as "sales tax" in the agreement will be considered an estimate of tax which may become due when the services are rendered. No sales tax should be paid to the board in connection with "pre-need" agreements until the services are rendered.

History: Effective August 1, 1933.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended and renumbered September 16, 1970, effective October 18, 1970.

Amended October 25, 1972, effective November 30, 1972.

Amended May 1, 1974, effective June 5, 1974.

Amended May 1, 1974, effective July 21, 1974. Noted additional interment allowance from U.S. Veterans Administration and illustrated effect on computation of tax exempt sales to federal government.

Amended December 7, 1978, effective February 18, 1979. Subsection (b)(3) and (c) amended to delete language on excess tax reimbursement and subsection (b)(5) with regard to "tax-paid purchase resold" was reworded.

Amended April 9, 1980, effective June 19, 1980. In (b)(3), Examples 1 and 2, substituted "$300" for "$250," "$180" for "$150," for "$125" and revised the computations accordingly.


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Regulation 1506. Miscellaneous Service Enterprises.

Reference: Sections 6006, 6007, 6015, 6018.1, 6018.7, 6358, 6358.4, and 6363, Revenue and Taxation Code.

(a) LICENSED ARCHITECTS.

(1) IN GENERAL. Fees paid to licensed architects for their ability to design, conceive or communicate ideas, concepts, designs, and specifications are not subject to tax. Any plans, specifications, renderings or models or other instruments of service provided by a licensed architect under a licensed architect's contract or commission are integral to the licensed architect's services and are not subject to tax. The licensed architect is the consumer of any tangible personal property, including plans, specifications, renderings or models, used or transferred in the performance of professional services notwithstanding the fact that a fee may be added to the cost of the property and separately stated on a billing to the customer. If after the completion of the contract or commission the licensed architect provides additional copies of the original plans or specifications, or any models or renderings of an existing structure, the architect is regarded as making a sale of such copies, models or renderings.

(2) LICENSED ARCHITECT. A "licensed architect" is defined under the Business and Professions Code Chapter 3, Division 3, Section 5500 as follows:

"As used in this chapter, architect means a person who is licensed to practice architecture in this state under the authority of this chapter."

A licensed architect preparing or being in responsible control of plans, specifications, and instruments of service is required to affix to those plans, specifications, and instruments of service their stamp or seal which bears the licensee's name, his or her license number, the legend "Licensed Architect" and the legend "State of California," and which shall provide a means of indicating the renewal date of the license.

(3) ARCHITECTURAL PERSPECTIVISTS AND MODELERS.
Architectural perspectivists do not act as "licensed architects." Architectural perspectivists are the retailers of renderings, prints and drawings they provide to architects or other consumers and tax applies to their entire charge for such items. Modelers do not act as "licensed architects." Modelers are the retailers of models they provide to architects or other consumers, and tax applies to their entire charge for such items.

(4) Licensed architects who produce renderings, prints, drawings or models pursuant to a contract that includes professional architectural services are not retailers of the renderings, prints, drawings or models they provide pursuant to that contract for architectural services. Tax does not apply to their charge for such items.

(b) BARBERS, BEAUTY SHOP OPERATORS, AND SHOE POLISHERS. Barbers, beauty shop operators, and shoe polishers are the consumers of the supplies and other property used in performing their services, and tax applies with respect to the sale to them of the supplies and other property. They are retailers, however, of supplies, used articles, or other tangible personal property, which they sell to customers in the regular course of business, and tax applies to the gross receipts from such sales.

(c) CLOTHES CLEANERS AND DYERS.

(1) CLOTHES CLEANING—IN GENERAL. Persons who provide clothes-cleaning services are consumers of the supplies and other materials used in performing their cleaning services, and tax applies to the sale to them of the supplies and other materials and not to their charges for such services.

(2) RENTALS. Clothes cleaners are the consumers of linen supplies and similar articles, including towels, uniforms, coveralls, shop coats, dust cloths, and similar items, rented to others when an essential part of the rental contract is the furnishing of the recurring service of laundering or cleaning of the articles rented, and tax applies with respect to the sale to them of such articles.

(3) CLOTHES DYEING—IN GENERAL. Persons who provide dyeing services are retailers, not consumers, when their charges are for the dyeing of new fabrics, garments, or other such items and tax applies to their gross receipts from such sales. Persons who dye new items are required to hold a seller's permit.

Dyers are consumers of the supplies and other materials used in dyeing used fabrics, garments, or other such items and tax applies to the sale to them of the supplies and other materials and not to their charges for their dyeing services.

(4) ALTERATION OF GARMENTS—IN GENERAL. For the purposes of this subdivision (c), alteration of garments means and includes any work performed upon new or used men's, women's and children's clothing to meet the requirements of the customer whether the work involves the addition of material to the garment, removal of material, refitting, or repairing. Alteration of garments does not mean or include the process of dyeing garments. Alteration of garments also does not mean or include work performed upon new or used personal and household items such as handbags, stuffed animals, bedding, and draperies. The application of tax to a clothes cleaner's or a dyer's charges for the alteration of personal or household items is explained in Regulation 1524.

(A) Alteration of Garments by Clothes Cleaning or Dyeing Establishments. A clothes cleaning or dyeing establishment, including wet cleaners (e.g., launderers) and dry cleaners, means and includes a clothes cleaner or dyer who (1) operates a location or locations as a pickup and delivery point for garment cleaning, or (2) provides spotting and pressing services on the premises, but not garment cleaning, or (3) operates a garment cleaning or dyeing plant on the premises. A clothes cleaner or dyeing establishment described above is the consumer of property used or furnished in the alteration of new or used garments provided that:

1. Seventy-five percent (75%) or more of the establishment's total gross receipts represent charges for garment cleaning or dyeing services, and

2. No more than twenty percent (20%) of the establishment's total gross receipts during the preceding calendar year were from the alteration of garments. If a clothes cleaner or dyer is not an establishment as described or does not meet the requirements of this paragraph (A), tax applies to the clothes cleaner's or the dyer's charges for the alteration of garments as explained in Regulation 1524.

(B) Alteration of Garments by a Third Party. When a clothes cleaner or dyer who meets the requirements of subdivision (c)(4)(A) contracts with a third party such as a tailor for the alteration of garments instead of performing such alterations itself, the clothes cleaner or dyer is a consumer, not a retailer, of the alterations provided by the third party and may not issue a resale certificate to the third party for such alterations. Tax applies to the third party's charges to the clothes cleaner or dyer for such alterations as explained in Regulation 1524.

(5) MISCELLANEOUS SALE OF ITEMS. Clothes cleaners and dyers, whether or not they meet the requirements of subdivision (c)(4)(A), are retailers of any supplies, used items, or other tangible personal property such as lint brushes, abandoned garments, wood hangers, or novelty items, which they sell to customers in the regular course of business, and tax applies to the gross receipts from such sales. As retailers of tangible personal property, such persons are required to hold a seller's permit.

(d) CIRCULATING LIBRARIES. When circulating libraries, which are engaged in the business of renting books to others, pay tax measured by the purchase price of such books either to the person from whom the books are purchased or to the board, tax does not apply to the amount charged for the rental of such books. Such libraries are retailers of new or used books which they sell to consumers in the regular course of business, and tax applies to the gross receipts from such sales.

(e) DENTISTS AND DENTAL LABORATORIES. Dentists are consumers of the materials, supplies, dental laboratory products and other tangible personal property which they use in performing their services. Tax, accordingly, applies to the sale of the tangible personal property to them.

Dental laboratories are the retailers of the plates, inlays and other products which they manufacture for dentists or other consumers. Tax applies to their entire charges for such products regardless of whether a separate charge or billing is made for materials and manufacturing services.

(f) GUN CLUBS. Gun clubs are consumers, not retailers, of clay pigeons or blue rocks furnished to members or patrons in connection with trapshooting or similar sports even though the charge for the service is measured by the number of clay pigeons or blue rocks used. The tax applies with respect to the sale of such property to the clubs.

(g) LICENSED HEARING AID DISPENSERS. Persons licensed as hearing aid dispensers by the Department of Consumer Affairs, Hearing Aid Dispensers Examining Committee, are consumers of hearing aids furnished or sold by them. The term "hearing aid" includes any necessary accessory or component part of the hearing aid which is fully worn on the body of the user such as cords, connector tubing, ear molds, or batteries, whether the part is sold or furnished separately or in conjunction with the hearing aid. The term also includes replacement and repair parts. Tax applies with respect to the sale of such products to licensed hearing aid dispensers.

Tax applies to the retail sale of such products by persons who are not licensed hearing aid dispensers.

(h) deletionORGANIZED CAMPS.

(1) CAMPS IN GENERAL. The tax applies to gross receipts from the sale of meals or other tangible personal property at deletioncamps, whether operated by municipal or private corporations, or other parties.

(2) CAMPS QUALIFYING AS SCHOOLS OR EDUCATIONS INSTITUTIONS. When a camp qualifies as a school or educational institution, the camp's sales of student meals are not subject to tax. deletionIf a camp meets all of the following conditions, the camp will qualify as a school or educational facility for purposes of this regulation:

(A) The camp conducts regularly scheduled classes,

(B) Students are required to attend the classes,

(C) Qualified instructors are in charge of the classes, and

(D) The camp is an "organized camp" as defined in California Health and Safety Code section 18897.

An example of a camp that qualifies as a school or education institution includes, but is not limited to the following: A camp offers a session where campers have a schedule of daily activities they are required to attend. These activities include team-building exercises, guided nature hikes, and wilderness survival techniques. The activities are led by staff that the camp determined to have sufficient training and experience to lead the activities.

An example of a camp that does not qualify as a school or educational institution includes, but is not limited to the following: A camp offers a session that includes activities that are regularly scheduled. Participants are required to attend a camp orientation on the first day, but during the rest of the camp they can attend as many of the scheduled activities as they want, or they can elect to attend no activities.

If a single charge is made for all of the privileges extended by the camp, a segregation must be made deletionon that portion of the total charge representing taxable receipts from the sale of meals or other tangible personal property. In the absence of such a segregation, the taxable receipts from the sale of meals or other tangible personal property shall be determined by the board based on information available to it.

(i) TAXIDERMISTS. Taxidermists are consumers of the materials used in repairing, stuffing and mounting skins, heads, etc., of animals, birds, fish, and the like furnished by their customers, and tax applies with respect to the sale of such property to them. If, however, a separate charge for such property is made on the invoices to the customers at the fair retail selling price, the taxidermist is the retailer of the property and tax applies to such separate charge.

Tax applies to retail sales by taxidermists of skins, heads, mountings or other tangible personal property.

(j) LICENSED VETERINARIANS.

(1) DEFINITIONS. As used herein:

(A) The term "licensed veterinarian" means any person licensed as a veterinarian by the California Department of Consumer Affairs, Board of Examiners in Veterinary Medicine.

(B) The term "drugs and medicines" includes substances or preparations intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in animals and which is commonly recognized as a substance or preparation intended for this use. The term includes legend drugs, pills and capsules (other than vitamins), liquid medications, injected drugs, ointments, vaccines, intravenous fluids, and medicated soaps if those soaps are available only to veterinarians. The term does not include vitamins, shampoos, pet foods, prescription diet foods, artificial diets, flea powders, and flea sprays.

(C) The term "professional services" includes the diagnosis and treatment of disease or trauma in animal life. It also includes the administration of drugs and medicines by means of, for example, injection, intravenous solution, or oral or bodily application.

(2) APPLICATION OF TAX.

(A) Licensed veterinarians are consumers of drugs and medicines which they use or furnish in the performance of their professional services. Accordingly, tax does not apply to a licensed veterinarian's charges to clients for such drugs and medicines, whether or not separately stated. Licensed veterinarians are also consumers of tangible personal property, other than drugs and medicines, which they use or which they furnish to clients without a separately stated charge. Tax applies to the sales of such drugs, medicines and other items to licensed veterinarians except:

1. Operative April 1, 1996, drugs or medicine which are purchased to be administered to animal life as an additive to feed or drinking water of food animals (as defined in Regulation 1587 (18 CCR 1587), "Animal Life, Feed, Drugs and Medicines") or of non-food animals which are being held for sale in the regular course of business, and the primary purpose of the drugs or medicines is the prevention and control of disease, or

2. Operative January 1, 1997, drugs or medicines which are purchased to be administered directly (e.g., orally, by injection, or by application to the body) to food animals and the primary purpose of the drugs or medicines is the prevention or control of disease of the food animals. Veterinarians remain consumers of drugs and medicines administered directly to non-food animals.

(B) Licensed veterinarians are retailers of drugs and medicines which they furnish for a consideration without performing specific related professional services. Licensed veterinarians are also retailers of tangible personal property, other than drugs and medicines, which they furnish to clients for a separately stated charge. Unless otherwise exempt, tax applies to charges made by licensed veterinarians to clients for such drugs, medicines and other items. See Regulation 1587 (18 CCR 1587), "Animal Life, Feed, Drugs and Medicines" for exemption for sales of feed, drugs, or medicines for certain animals. Tax applies to separately stated charges made for X-rays if the X-rays are delivered to clients.

History: Effective August 1, 1933.

Adopted as of January 1, 1945, as a restatement of previous rulings.

Amended September 2, 1965, applicable August 1, 1965 Rulings 3 and 4 (Cal. Admin. Codes 1903 and 1904).

Effective May 1, 1940 Ruling 9 (Cal. Admin. Code 1909).

Adopted November 3, 1969, as restatement of former Rulings 3 (Cal. Admin. Code 1903); 4 (Cal. Admin. Code 1904); 5 (Cal. Admin. Code 1905); 6 (Cal. Admin. Code 1906); 9 (Cal. Admin. Code 1909); 10 (Cal. Admin. Code 1910), effective December 5, 1969.

Amended June 22, 1983, effective October 7, 1983. In subsection (e), deleted last sentence and added new last sentence.

Amended May 1, 1985, effective May 31, 1985. A new subdivision (e), which defines the term "hearing aids", has been added and is entitled "Licensed Hearing Aid Dispensers." It explains that licensed hearing aid dispensers are, as of January 1, 1985, the consumers of hearing aids which they furnish or sell. However, the section also states that tax will apply to retail sales of hearing aids when sold by persons who are not licensed hearing aid dispensers. Subdivision (e), which is entitled "Summer Camps" has been renumbered to subdivision (f). Subdivision (f), which is entitled "Taxidermists", has been renumbered to subdivision (g).

Amended July 30, 1986, effective November 7, 1986. In subdivision (h), added explanation that licensed veterinarians are consumers of certain drugs and medicines. In subdivision (h)(1)(A), added definition of term "licensedveterinarian". In subdivision (h)(1)(B), added definition of term "drugs and medicines". In subdivision (h)(1)(C), added definition of term "professional services". In subdivision (h)(2)(A), added explanation concerning application of tax to certain drugs and medicines by licensed veterinarians. In subdivision (h)(2)(B), added explanation that licensed veterinarians are retailers of certain drugs and medicines. The subdivision also specified the correct application of tax to certain charges made for X-rays.

Amended June 9, 1998, effective July 9, 1998. Amended subdivision (h) to incorporate provisions of Chapter 620, Statutes of 1995, and Chapter 954, Statutes of 1996. Subdivisions (a), (e), and (h) were amended to correct outdated terminology or references. Subdivision (h) was amended to delete an unnecessary effective date.

Amended June 17, 2000, effective September 15, 2000. Subdivision (a) added; former subdivisions (a)–(h) redesignated (b)–(i) accordingly.

Amended December 17, 2008, effective April 10, 2009. Amended subdivision (b) to delete launderers and cleaners. Subdivision (c) added for clothes cleaners and dyers; former subdivisions (c)–(i) redesignated (d)–(j) accordingly.

Amended December 14, 2010, effective March 2, 2011. Amended subdivision (h) to rename subdivision "Organized Camps" and to clarify application of tax to sales of meals when the camp qualifies as a school or educational institution.


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Regulation 1507. Technology Transfer Agreements.

Reference: Sections 6011 and 6012, Revenue and Taxation Code.

Preston v. State Board of Equalization (2001) 25 Cal. 4th 197,105 Cal. Rptr. 2d 407.

(a) DEFINITIONS.

(1) "Technology transfer agreement" means an agreement evidenced by a writing (e.g., invoice, purchase order, contract, etc.) that assigns or licenses a copyright interest in tangible personal property for the purpose of reproducing and selling other property subject to the copyright interest. A technology transfer agreement also means a written agreement that assigns or licenses a patent interest for the right to manufacture and sell property subject to the patent interest, or a written agreement that assigns or licenses the right to use a process subject to a patent interest.

A technology transfer agreement does not mean an agreement for the transfer of any tangible personal property manufactured pursuant to a technology transfer agreement, nor an agreement for the transfer of any property derived, created, manufactured, or otherwise processed by property manufactured pursuant to technology transfer agreement.deletion

Example No. 1: Company X holds a copyright in certain tangible artwork. Company X transfers (temporarily or otherwise) its artwork to Company Y and, in writing, transfers (temporarily or otherwise) a copyright interest to Company Y authorizing it to reproduce and sell tangible personal property subject to Company X's copyright interest in the artwork. Company X's transfer of artwork and a copyright interest to Company Y constitutes a technology transfer agreement.

Company Y's sales of tangible personal property containing reproductions of Company X's artwork do not constitute a technology transfer agreement.

Example No. 2: Company X holds patents for widgets and the process for manufacturing such widgets. Company X, in writing, transfers (temporarily or otherwise) its patent interests to sell widgets and the process used to manufacture such widgets to Company Y. Company X's transfer of its patent interests to Company Y constitutes a technology transfer agreement. Company Y's sale or storage, use, or other consumption of any widgets that it manufactures does not constitute a technology transfer agreement. Company Y's sale or storage, use, or other consumption of any tangible personal property used to manufacture widgets also does not constitute a technology transfer agreement.

Example No. 3: Company X manufactures and leases a patented medical device to Company Y. As part of the lease of the medical device, Company X also transfers to Company Y, in writing, a separate patent interest in a process external to the medical device that involves the use, application or manipulation of the medical device. Company X charges a monthly rentals payable for the equipment as well as a separate charge for each time the separate patented process external to the medical device is performed by Company Y. Company X's lease of the medical device to Company Y to perform the separately patented process is not a technology transfer agreement and tax applies to the entire rentals payable for the medical equipment. Company X's transfer of its separate patent interest for the right to perform the separate patented process external to the medical device is a technology transfer agreement. Company X's separate charges to Company Y for the right to perform the separate patented process external to the medical device are not subject to tax provided they relate to the right to perform the separate patented process, are not for the lease of the medical device, and represent a reasonable charge for the right to perform the separate patented process external to the medical device. Where the separate charges for the right to perform the separate patented process relate to the patented technology embedded in the internal design, assembly or operation of the medical device, Company X's separate charges for the right to perform the separate patented process are not pursuant to a technology transfer agreement and are instead part of the rentals payable from the lease of the medical device.

(2) "Copyright interest" means the exclusive right held by the author of an original work of authorship fixed in any tangible medium to do and to authorize any of the following: to reproduce a work in copies or phonorecords; to prepare derivative works based upon a work; to distribute copies or phonorecords of a work to the public by sale or other transfer of ownership, or by rental, lease, or lending; to perform a work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works; to display a copyrighted work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work; and in the case of sound recordings, to perform the work publicly by means of a digital audio transmission. For purposes of this regulation, an "original work of authorship" includes any literary, musical, and dramatic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound recordings, including phonograph and tape recordings; and architectural works represented or contained in tangible personal property.

(3) "Patent interest" means the exclusive right held by the owner of a patent issued by the United States Patent and Trademark Office to make, use, offer to sell, or sell a patented process, machine, manufacture, composition of matter, or material. "Process" means one or more acts or steps that produce a concrete, tangible and useful result that is patented by the United States Patent and Trademark Office, such as the means of manufacturing tangible personal property. Process may include a patented process performed with an item of tangible personal property, but does not mean or include the mere use of tangible personal property subject to a patent interest.

(4) "Assign or license" means to transfer in writing a patent or copyright interest to a person who is not the original holder of the patent or copyright interest where, absent the assignment or license, the assignee or licensee would be prohibited from making any use of the copyright or patent provided in the technology transfer agreement.

(b) APPLICATION OF TAX.

(1) Tax applies to amounts received for any tangible personal property transferred in a technology transfer agreement. Tax does not apply to amounts received for the assignment or licensing of a patent or copyright interest as part of a technology transfer agreement. The gross receipts or sales price attributable to any tangible personal property transferred as part of a technology transfer agreement shall be:

(A) The separately stated sale price for the tangible personal property, provided the separately stated price represents a reasonable fair market value of the tangible personal property;

(B) Where there is no such separately stated price, the separate price at which the tangible personal property or like (similar) tangible personal property was previously sold, leased, or offered for sale or lease, to an unrelated third party; or,

(C) If there is no such separately stated price and the tangible personal property, or like (similar) tangible personal property, has not been previously sold or leased, or offered for sale or lease to an unrelated third party, 200 percent of the combined cost of materials and labor used to produce the tangible personal property. "Cost of materials" consists of those materials used or otherwise physically incorporated into any tangible personal property transferred as part of a technology transfer agreement. "Cost of labor" includes any charges or value of labor used to create the tangible personal property whether the transferor of the tangible personal property contributes such labor, a third party contributes the labor, or the labor is contributed through some combination thereof. The value of labor provided by the transferor of the tangible personal property shall equal the separately stated, reasonable charge for such labor. Where no separately stated charge for labor is made, the value of labor shall equal the lower of the taxpayer's normal and customary charges for labor made to third persons, or the fair market value of such labor performed.

(2) Tax applies to all amounts received from the sale or storage, use, or other consumption of tangible personal property transferred with a patent or copyright interest, where the transfer is not pursuant to a technology transfer agreement.

(3) Specific Applications. Tax applies to the sale or storage, use, or other consumption of artwork and commercial photography pursuant to a technology transfer agreement as set forth in Regulation 1540, Advertising Agencies, Commercial Artists and Designers.

History: Adopted March 27, 2002, effective July 6, 2002. Effectively implementing the decision in the case of Preston v. State Board of Equalization (2001) 25 Cal. 4th 197, 105 Cal. Rptr. 2d 407.

Change without regulatory effect deleting the last sentence in the second paragraph of subdivision (a)(1) providing that "A technology transfer agreement also does not mean an agreement for the transfer of prewritten software," which was held invalid by the Court of Appeal in Nortel Networks, Inc., v. State Board of Equalization (2011) 191 Cal.App.4th 1259, 1278, filed June 22, 2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 26-Z).


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