Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2014
Sales and Use Tax Annotations
120.0000 AUTOMATIC DATA PROCESSING SERVICES AND EQUIPMENT—Regulation 1502
(c) CUSTOM PROGRAMS
120.3086 Custom Program Lease Receipts. A company designs and leases computer software for the pension service industry and provides consulting services for that industry. Since the company's prewritten systems must be modified to conform with the customer's particular hardware and unique application needs, each California customer who purchases a license to use the system pays a license fee that is comprised of two separately stated amounts: a charge of $450 for the basic prewritten system, and a charge of $475 for custom modifications to that system. The decision to charge on a flat rate basis was so that all customers would be aware and would be able to plan for their cost of the service. The company stated that because there is a flat rate charge for custom programming, there is a point beyond which customization is not provided. Therefore, it is common to have separate charges for data conversion.
The agreed price, as opposed to market value or some subsequently revealed price, dictates the appropriate sales and use tax treatment. Thus, the price charged for the basic prewritten system is the measure of the gross receipts. Regulation 1502 provides for an evaluation of whether or not there is a substantial modification only in the case of a charge for a custom program that is not separately stated. The charge in this case is separately stated. The law does not require that a business charge for its product in any specific fashion. It is reasonable that if the company is working under a flat fee concept, there must be a limit to the service it provides. The provision in the contract that protects the company from having to provide customization that was outside the scope of the norm amounts to a "safety valve" for the company to use in the event the customer desires service that goes beyond the scope of that which is presumed by the parties. Given these facts, there is no requirement for the company to charge on an hourly basis and the company has complied with the letter and intent of the law. Tax is due only on the flat fee charged for prewritten program. 5/25/91.