Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Annotations
395.0000 OCCASIONAL SALES—SALE OF A BUSINESS—BUSINESS REORGANIZATION—Regulation 1595
(f) SALE OF A BUSINESS GENERALLY
395.1189 Intellectual Property. Company A, which holds a seller's permit, is selling substantially all of its assets to Company B. Company A is a supplier of specialized information management software, related databases, and also provides services to certain industries. The seller does not own all of the computer storage media containing the intellectual property. The storage media is located in California as follows:
(1) In two mainframe computers on loan from a third party as part of a joint development agreement.
(2) On a leased VAX computer of which Company A owns 43 gigabytes of space and leases 25 gigabytes from the equipment lessor (A pays use tax on rentals payable).
(3) Storage media on PC's owned by A. (4) On magnetic tapes stored in a facility as back up files and archived materials.
(5) On Company A owned magnetic tapes and floppy disks held for resale.
(6) Company A owned tapes and disks located at its facilities or at a third party manufacturer facilities which are used to duplicate tapes or disks for resale.
(7) Company A also plans to lease another 44 gigabytes of disk space to be installed prior to sale.
The sales agreement provides that any tangible personal property containing software source code or other intellectual property will be transferred as follows:
The transfer is set forth in chronological order:
(a) Company A will lease equipment containing 44 gigabytes of disk space for a term of three years (item 7 above).
(b) It will lease a VAX 6000 computer for three months to make electronic transfers described below.
(c) It will transfer all of the information contained in its owned VAX machine storage media to the newly leased 44 gigabytes of disk space.
(d) It will assign its lease of the newly leased 44 gigabytes of storage media and the 25 gigabytes described in (2) above.
(e) It will assign its contract with the third party described in (1) above to the buyer.
(f) It will assign its lease of the computers described in (2) above to the buyer and also its newly leased VAX computer described in (b).
(g) All of the information contained in the PC's described in (3) above will be transferred electronically by directly linking the storage media involved to the buyer's newly leased VAX computer.
(h) After the buyer creates a back up of the information and verifies the system, Company A will erase the information contained in its VAX machine storage media and the storage media in the PC's.
(i) Company A will transfer the blank storage media to the buyer.
(j) The buyer will transmit information in its storage media to its PC's by linking them to its newly leased VAX 6000.
(k) Until closing, the buyer will lease or loan Company A all of the equipment transferred and give Company A an exclusive license to use the intellectual property royalty-free.
(l) Company A will destroy or erase all tapes and disks containing source code or database.
(m) The buyer will produce and send new tapes or disks to third party instate manufacturers and instruct the manufacturers to erase or destroy the old tapes and disks.
(n) Company A retains ownership of storage media described in (4) above not transferred that contains source code or database information. (o) Title to all documents, manuals, diagrams, designs, schematics, test reports, drawings, printouts, will be transferred for a price of 130 percent of the cost of physical reproduction
(p) Following closing, the buyer is allowed to copy any information on Company A's storage media; and one year from closing, Company A will transfer all of its storage media with the purchase price being the value of the blank tapes or disks plus any transfer costs.
Sales or use tax does not apply to the electronic transfer of the intellectual property contained in Company A's PC storage media or the exclusive royalty-free license described in (k) above.
Sales tax will apply to all documentation described in (o) above at the price agreed upon.
Neither sales nor use tax applies from the assignment of lease or contracts involving Company A's leased storage media, the leased VAX computer hardware, or the third party mainframes (item 1 above), except the buyer assumes Company A's tax obligation on the leases on which tax is paid on rental receipts.
Tax applies to the transfer of the PC's, the blank Company A owned 43 gigabytes (See Item 2) and the blank or erased storage media based on fair market value as determined by the agreement.
Tax does not apply to post-closing copies made by the buyer from Company A's tax paid media, but tax does apply to the transfer of media described in (p) above.
No sales or use tax will be due from the lease of equipment by the Buyer to Company A pursuant to (k) except for any continuing obligation to pay use tax measured by rentals or the transfer. 6/4/93.