Laws, Regulations and Annotations


Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations

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325.0000 Interstate and Foreign Commerce—Regulation 1620

Annotation 325.0130

(a) In General—Shipments Into California from Points Outside State

325.0130 Software Delivered in California. An out-of-state taxpayer who develops and sells clinical medical software entered into a license agreement with a medical institution (customer) on June 29, 1990, whereby the customer acquired the right to use certain computer software at ten of its clinical reference laboratory sites located throughout the country. The sales agreement tentatively identified eight of the ten sites. However, the customer retained the right to substitute equivalent size facilities for any site. The agreement identified the customer's Texas laboratory as being the first laboratory site for installation of the software. The sales agreement permitted the customer to make copies of the software to fulfill the ten site requirement, eliminating the need for the taxpayer to ship more than one copy of the tape containing the software. The agreement did not specify a purchase price for each site. The agreement merely listed all of the software licensed for ten sites and indicated a total price of $2,500,000. Terms for payment linked payment to the earlier of the conversion of various sites or specified dates. Full payment was due by December 15, 1992, or after the conversion on the seventh site.

On June 20 and July 6, 1990, the taxpayer shipped tapes containing the licensed software to the customer's California headquarters. The software was shipped prior to the contract signing due to the short time frame contemplated for the ten-site installation.

The customer's employees created an appropriate environment on computer hardware located at the California headquarters and installed the licensed software. The software was also tested to insure that it was functioning correctly. In August 1990, a copy of the software and database was transferred from the customer's California headquarters to the Texas site where it was installed and the database completed. Although the software media was delivered in June and July of 1990, the first invoice was not issued until November 1990.

The software has remained installed at the California headquarters since the date of the original installation in July 1990. The headquarters was also a licensed site.

Under these facts, the customer purchased tangible personal property from a retailer for use in this state. When the customer installed the software in its computer in California, it made a use of the software in this state. The sales agreement permitted the customer to make the copy of the software in California, and the customer did, in fact, make the copies in this state rather than the taxpayer shipping copies to other sites from its out-of-state location. Under these circumstances, use tax applied to customer's use of the software in this state measured by the total sales price of $2,500,000. As a retailer engaged in business in California, taxpayer was required to collect the use tax from the customer. 3/29/94.