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Business Taxes Law Guide—Revision 2024

Sales and Use Tax Annotations


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U


570.0000 Use of Property in State and Use Tax Generally

Annotation 570.0174

(a) In General


570.0174 Integration of New Computer System with Old. A taxpayer purchases a computer and network software from a manufacturer located outside California. The items purchased are shipped from the manufacturer's out-of-state location with title passing to the taxpayer at the point of shipment. The computer and software are shipped to the taxpayer's facility in California on a temporary basis for a period of two to five months in order to permit the taxpayer's programmers to fully integrate the new computer with the one that is in place in California. After testing and integrating the new and old systems, the taxpayer will use the new system to run programs and perform tasks useful to the taxpayer in its business, even if the programs or tasks are duplicated in some other fashion by the taxpayer's existing systems. Integrating the systems rather than testing the new system simply to see if it can communicate with the existing system and to see if it meets the taxpayer's specifications consumes the majority of the taxpayer's time and effort during the two to five month period that the property remains in California.

The above purchase of the computer and software is subject to use tax because the first functional use of the property is in California. The taxable activity to which use tax applies is the taxpayer's integration of the computer system, including the hardware and software, into its existing computer system for compatibility with the existing system. The taxpayer is making a use in California of the property for a purpose for which the system is designed, namely to run programs and perform tasks related to the taxpayer's business needs. Because the first functional use of the property is in California and not out of state, it does not matter whether or not the property is principally used outside of California more than one-half of the time within the first six months after the property enters California. That is, the taxpayer owes use tax on the property regardless of whether the period of testing and integration in California lasts as little as two months or as long as five months.

Integrating the new system with the existing system is not a storage or use of the kind excluded from use tax by section 6009.1. The taxpayer's use of the new system to modify existing programs, write new programs, modify the new software, or in other ways develop processes and procedures to ensure that the two systems function as a unit in the taxpayer's business operations, is not of a kind excluded from use tax under section 6009.1. The integration of the system is an end in itself which is necessary for the taxpayer's business purposes, regardless of the property's ultimate permanent location. 9/30/83.