Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2017

Sales and Use Tax Annotations

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Annotation 120.0539


120.0539 Software—License to Use and Sell. Corporation A is a software manufacturer that purchased certain property from Corporation B which is also in the software developing and manufacturing business. The property purchased consisted of source code, duplication copies, consumer copies, and software documentation. The source code is maintained on a unique computer in another state, but the working copies are located in California.

The contract provided for Corporation B to retain royalties, which are contingent on future sales volumes by Corporation A, up to a stated amount. The source code is protected under federal copyrights. Corporation A purchased thesource code to modify or expand it for purposes of copying and selling the modified program to others. Since the source code is protected under federal copyright, tax does not apply to Corporation B's sales of the source master code or to the transfer of tangible copy of the program transferred concurrently with the granting of the right to copy the software for the purpose of selling it, and not for other use. Tax does not apply to the concurrent transfer of the tangible copy of the program because the transfer of that copy is considered to be incidental to the granting of the right to copy and sell the program.

In addition, Corporation B has transferred copies on storage media in addition to the single copy necessary to transmit the program for purposes of copying and selling. These copies are to be used for research and advanced development. Thus, Corporation A has also sold tangible personal property for use as a manufacturing aid. The sale of such additional tangible personal property is not incidental to the transfer of the source code. Corporation A also transferred software documentation, manuals, and other tangible personal property. Sales tax applies to the sale of that property if located inside California at the time of sale, and use tax applies to the use of property purchased by Corporation A outside California which is first functionally used inside this state, or which is brought into California within 90 days after purchase unless the property is stored outside this state on half or more of the time during the six-month period immediately following its entry into this state. 4/29/96.