Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Navistar Internat. Transportation Corp. v. State Board of Equalization . . . (1994)

Transfers of Drawings and Designs, Manuals and Procedures, and Computer Programs Are Taxable Sales of Tangible Personal Property

One corporation sold all of the assets of its solar division to another corporation. At the time of the sale, the corporations agreed to allocate the purchase price among the various assets to be transferred. The assets that were the subject of the tax dispute in this case fell into three categories: drawings and designs, manuals and procedures, and computer programs. The Board determined that the assets constituted tangible personal property, and that their sale was subject to sales tax. The corporations filed an action for refund in superior court, and the court ruled in favor of the Board. After the Court of Appeal affirmed the trial court's judgment, the California Supreme Court granted review.

Plaintiffs argued that with respect to sales of the drawings and designs, and the manuals and procedures, the objective of the purchaser was primarily to acquire the intellectual content embodied in the physical objects, not to acquire the objects themselves. Thus, plaintiffs contended, the transfer was not a sale of tangible personal property, so it was not subject to sales tax. With respect to the computer software, plaintiffs argued that it was "custom" software, and therefore was not taxable. The Supreme Court affirmed the judgment of the Court of Appeal, holding that the sale of drawings and designs, and manuals and procedures, constituted a taxable sale of tangible personal property. The sale of the documents was not excluded from tax as being incidental to the performance of a service under Regulation 1501; the sale was subject to tax regardless of the fact that the documents were not physically useful in the manufacturing process; and the characterization of the documents as intangibles for federal tax purposes was not determinative of characterization for sales tax purposes. The court also held that the computer programs did not qualify as custom computer programs. Although they were initially developed on a custom basis, the subsequent sales were taxable sales of prewritten programs, not of custom computer programs as defined in Revenue and Taxation Code section 6010.9. Navistar Internat. Transportation Corp. v. State Board of Equalization (1994) 8 Cal.4th 868.