Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 515.0448


515.0448 Developing Software Program. A and B enter into a contract whereby A will assist B in developing computerized systems and data bases generally known as an Expert System (system that uses artificial intelligence techniques). Both parties are to provide their expertise and knowledge in their particular field to the venture. All ideas, inventions, hardware, firmware, software or documentation, whether or not protectable by copyright, patents or trade secrets, developed in the performance of the services will be jointly owned.

Under this scenario, the agreement is one for services only and not for services which are a part of the sale or lease of tangible personal property. Of course, if any tangible personal property is transferred by A to B in connection with the performance of this contract, tax would apply to those charges. For example, the contract calls for third party products to be transferred without mark up.

Under a provision of the contract, A will transfer to B a copy of any knowledge base developed. This transfer would take the form of tangible personal property, such as tape, disk, or other magnetic storage media. Such a transfer of storage media would be merely incidental to the performance by A of the service of developing the knowledge base and not a sale of tangible personal property.

It is also possible that an "Expert System" developed by A and transferred to B might be considered a computer program as that term is defined in section 6010.9(c). If it is a computer program, rather than data or information, it would nevertheless be a nontaxable custom computer program under section 6010.9, since it would be prepared by A to the special order of B pursuant to the agreement. Thus, A would be considered to be providing the service of developing the custom program, rather than selling the program. 7/21/88.