Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2016
Sales and Use Tax Annotations
120.0000 AUTOMATIC DATA PROCESSING SERVICES AND EQUIPMENT—Regulation 1502
(a) IN GENERAL
120.0560.600 Software Rental and Installation Agreement. A taxpayer entered into a contract to license its software programs on a rental basis. It also rented computer hardware (on which it paid California sales tax reimbursement at the time of purchase) as well as a third party software license (on which it also paid sales tax reimbursement at time of purchase). In addition, the taxpayer's monthly charge to the client included a charge for installation and upgrade work.
The sale of the taxpayer's prewritten computer programs transferred to the customer in the form of storage media constitutes a sale of tangible personal property. Tax applies to the entire amount charged for the prewritten programs, including all license fees. (Regulation 1502 (f)(1).)
Labor charges for installation of prewritten programs are excluded from the measure of tax. Installation includes the actual installation of software and the testing of the prewritten programs on the purchaser's computer to ensure that the programs operate as required. (Regulation 1502(f)(1)(E).) This exclusion does not encompass any other services, such as converting a customer's data into a format suitable for use with the new software. Conversion services are part of the sale of the prewritten program and charges attributable to such services are taxable.
Since the taxpayer has timely paid "sales tax" on the hardware and the third party software and they are being leased in the same form as acquired (taxpayer transferred physical possession of the storage media on which the original third party software was acquired), tax does not apply to the amount charged by the taxpayer for the lease of these items. 1/18/96.