State of California
BOARD OF EQUALIZATION
SALES AND USE TAX REGULATION
REGULATION 1502. COMPUTERS, PROGRAMS, AND DATA PROCESSING.
Reference: Sections 995.2, 6006, 6007, 6010, 6010.9, 6011, 6012, 6015, and 6016, Revenue and Taxation Code.
(a) IN GENERAL. 鈥淎utomatic data processing services鈥? are those rendered in performing all or part of a series of
data processing operations through an interacting assembly of procedures, processes, methods, personnel, and
computers.
Automatic data processing services may be provided by manufacturers of computers, data processing centers,
systems designers, consultants, software companies, etc. In addition, there are banks and other businesses which
own or lease computers and use them primarily for their own purposes but occasionally provide services to others.
Businesses rendering automatic data processing services will be referred to herein as 鈥渄ata processing firms.鈥?
(b) DEFINITIONS OF TERMS.
(1) APPLICATION. The specific job performance by an automatic data processing installation. For example,
data processing for a payroll may be referred to as a payroll application.
(2) CODING. The list, in computer code, of the successive computer instructions representing successive
computer operations for solving a specific problem.
(3) COMPUTER. A computer is an electronic device (including word processing equipment and testing
equipment) or combination of components, which is programmable and which includes a processor (central
processing unit or microprocessor), internal memory, and input and output connections. Manufacturing equipment
which incorporates a computer is a computer for purposes of this regulation. However, the term does not include
manufacturing equipment which operates under the control of mechanical or electronic accessories, the attachment
of the equipment of which is required for the machine to operate. An electronic device otherwise qualifying as a
computer remains a computer even though it may be used for information processing, data acquisition, process
control, or for the control of manufacturing machinery or equipment.
(4) CUSTOM COMPUTER PROGRAM AND PROGRAMMING. A computer program prepared to the special
order of the customer. A program prepared to the special order of the customer qualifies as a custom program even
though it may incorporate preexisting routines, utilities, or similar program components. It includes those services
represented by separately stated charges for modifications to an existing prewritten program which are prepared to
the special order of the customer.
(5) DATA ENTRY (INCLUDING ENCODING). Recording information in or on storage media by punching holes
or inserting magnetic bits to represent letters, digits, and special characters.
(6) DIGITAL PRE-PRESS INSTRUCTION. The creation of original information in electronic form by combining
more than one computer program into specific instructions or information necessary to prepare and link files for
electronic transmission for output, within the printing industry, to film, plate, or direct to press, which is then
transferred on electronic media such as tape or compact disc.
(7) INPUT. The information or data transferred, or to be transferred, from storage media into the internal
storage of the computer.
(8) OUTPUT. The information transferred from the internal storage of the computer to storage media or
tabulated listing.
(9) PREWRITTEN PROGRAM. A program held or existing for general or repeated sale or lease. The term also
includes a program developed for in-house use which is subsequently offered for sale or lease as a product.
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Regulation 1502. (Continued)
(10) PROGRAM. The complete plan for the solution of a problem, i.e., the complete sequence of automatic data
processing equipment instructions necessary to solve a problem; includes both systems and application programs
and subdivisions such as assemblers, compilers, routines, generators, and utility programs.
(11) PROOF LISTING. A tabulated listing of input.
(12) SOURCE DOCUMENTS. A document supplied by a customer of a data processing firm from which basic
data are extracted (e.g., sales invoice).
(13) STORAGE MEDIA. Includes hard disks, floppy disks, diskettes, magnetic tape, cards, paper tape, drums,
and other devices upon which information is recorded.
(c) BASIC APPLICATIONS OF TAX.
(1) The transfer of title, for a consideration, of tangible personal property, including property on which or into
which information has been recorded or incorporated, is a sale subject to tax.
(2) Charges for producing, fabricating, processing, printing, imprinting, or otherwise physically altering,
modifying or treating consumer-furnished tangible personal property (cards, tapes, disks, etc.), including charges for
recording or otherwise incorporating information on or into such tangible personal property, are generally subject to
tax.
(3) A transfer for a consideration of the title or possession of tangible personal property which has been
produced, fabricated, or printed to the special order of the customer, including property on which or into which
information has been recorded or incorporated, is generally a sale subject to tax. However, if the contract is for the
service of researching and developing original information for a customer, tax does not apply to the charges for the
service. The tangible personal property used to transmit the original information is merely incidental to the service.
(4) Charges for the transfer of computer-generated output are subject to tax where the true object of the
contract is the output and not the services rendered in producing the output. Examples include artwork, graphics,
and designs. However, the transfer by the seller of the original information created by digital pre-press instruction is
not subject to tax if the original information is a custom computer program as explained in subdivision (f)(2)(F).
(5) Charges for processing customer-furnished information (sales data, payroll data, etc.) are generally not
subject to tax. (For explanation and specific application of tax, see subdivision (d).)
(6) Leases of tangible personal property may be subject to tax under certain conditions. (See Regulation 1660
for application of tax to leases.)
(7) Charges made for the use of a computer, on a time-sharing basis, where access to the computer is by
means of remote telecommunication are not subject to tax. (See subdivision (i).)
(8) Generally data processing firms are consumers of all tangible personal property, including cards and forms,
which they use in providing nontaxable services unless a separate charge is made to customers for the materials, in
which case tax applies to the charge made for the materials.
(d) MANIPULATION OF CUSTOMER-FURNISHED INFORMATION AS SALE OR SERVICE.
(1) GENERAL. Generally tax applies to the conversion of customer-furnished data from one physical form of
recordation to another physical form of recordation. However, if the contract is for the service of developing original
information from customer-furnished data, tax does not apply to the charges for the service. The tangible personal
property used to transmit the original information is merely incidental to the service.
(2) DATA ENTRY AND VERIFICATION. This covers situations where a data processing firm鈥檚 agreement
provides only for data entry, data verification, and proof listing of data, or any combination of these operations. It
does not include contracts under which these services are performed as steps in processing of customer-furnished
information as discussed under subdivision (d)(5).
Agreements providing solely for data entry and verification, or data entry, providing a proof list and/or verifying of data
are regarded as contracts for the fabrication of storage media and sales of proof lists. Charges therefor are taxable,
whether the storage media are furnished by the customer or by the data processing firm.
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Regulation 1502. (Continued)
Tax also applies to charges for the imprinting of characters on a document to be used as the input medium in an
optical character recognition system. The tax application is the same regardless of which type of storage media is
used in the operation.
(3) ADDRESSING (INCLUDING LABELS) FOR MAILING. Where the data processing firm addresses, through
the use of its computer or otherwise, material to be mailed, with names and addresses furnished by the customer or
maintained by the data processing firm for the customer, tax does not apply to the charge for addressing. Similarly,
where the data processing firm prepares, through the use of its computer or otherwise, labels to be affixed to material
to be mailed, with names and addresses furnished by the customer or maintained by the data processing firm for the
customer, tax does not apply to the charge for producing the labels, whether or not the data processing firm itself
affixes the labels to the material to be mailed. (For the sale of mailing list by the proprietor of such list, as a sale of
tangible personal property or as a nontaxable addressing, see Regulation 1504 鈥淢ailing Services.鈥?)
(4) MICROFILMING AND PHOTORECORDING. Tax applies to charges for microfilming or photorecording
except, as provided in subdivision (d)(5), where the microfilming or photorecording is done under a contract for the
processing of customer-furnished information. Tax applies to a contract where data on magnetic tape are converted
into combinations of alphanumeric printing, curve plotting and/or line drawings, and put on microfilm or
photorecording paper.
(5) PROCESSING OF CUSTOMER-FURNISHED INFORMATION.
(A) 鈥淧rocessing of customer-furnished information鈥? means the developing of original information from data
furnished by the customer. Examples of automatic data processing processes which result in original information are
summarizing, computing, extracting, sorting, and sequencing. Such processes also include the updating of a
continuous file of information maintained by the customer with the data processing firm.
(B) 鈥淧rocessing of customer-furnished information鈥? does not include: (1) an agreement providing solely for
the reformatting of data or for the preparation of a proof listing or the performance of an edit routine or other pre-
processing, (2) the using of a computer as a mere printing instrument, as in the preparation of personalized
computer-printed letters, (3) the mere converting of data from one medium to another, (4) an agreement under which
a person undertakes to prepare artwork, drawings, illustrations, or other graphic material unless the provisions of
subdivision (f)(2)(F) apply regarding digital pre-press instruction and custom computer programs. Additionally,
graphic material furnished incidentally to the performance of a service is not subject to tax. For example, graphics
furnished in connection with the performance of architectural, engineering, accounting, or similar professional
services are not subject to tax. With respect to typography, clip art combined with text on the same page is
considered composed type as explained in Regulation 1541.
(C) Contracts for the processing of customer-furnished information usually provide that the data processing
firm will receive the customer鈥檚 source documents, record data on storage media, make necessary corrections,
process the information, and then record and transfer the output to the customer.
Where a data processing firm enters into a contract for the processing of customer-furnished information, the transfer
of the original information to the customer is considered to be the rendering of a service. Except as described in
subdivisions (c)(8) and (d)(5)(E), tax does not apply to the charges made under contracts providing for the transfer of
the original information whether the original information is transferred on storage media, microfilm, microfiche,
photorecording paper, input media for an optical character recognition system, punched cards, preprinted forms, or
tabulated listing. The breakdown of the total charge into separate charges for each operation involved in processing
the customer-furnished information will not change the application of tax.
(D) The furnishing of computer programs and data by the customer for processing under direction and
control of the data processing firm will not alter the application of tax, notwithstanding that charges are based on
computer time.
(E) Taxable Items. Where a data processing firm has entered into a contract which is regarded as a
service contract under subdivision (d)(5)(C) and the data processing firm, pursuant to the contract, transfers to its
customer tangible property other than property containing the original information, such as: duplicate copies of
storage media; inventory control cards for use by the customer; membership cards for distribution by the customer;
labels (other than address labels); microfiche duplicates; or similar items for use, tax applies to the charges made for
such items. If no separate charge is made, tax applies to that portion of the charge made by the data processing firm
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Regulation 1502. (Continued)
which the cost of the additional computer time (if any), cost of materials, and labor cost to produce the items bear to
the total job cost.
(F) Additional Copies. When additional copies of records, reports, tabulation, etc., are provided, tax applies
to the charges made for the additional copies. 鈥淎dditional copies鈥? are all copies (other than carbon copies), whether
the copies are prepared by rerunning the same program, by using multiple simultaneous printers, by looping a
program such that the program is run continuously, by using different programs to produce the same output product,
or by other means. Where additional copies are prepared the tax will be measured by the charge made by the data
processing firm to the customer. If no separate charge is made for the additional copies, tax applies to that portion of
the gross receipts which the cost of the additional computer time (if any), the cost of materials and labor cost to
produce the additional copies bear to the total job cost. Charges for copies produced by means of photocopying,
multi-lithing, or by other means are subject to tax.
(e) TRAINING SERVICES AND MATERIALS. Data processing firms provide a number of training services, such as
data entry and verification, programming, and specialized training in systems design.
(1) Charges for training services are nontaxable, except as provided in subdivision (g) where the training
services are provided as part of the sale of tangible personal property. The data processing firm is the consumer of
tangible personal property which is used in training others, or provided to trainees without a separate charge as a part
of the training services.
(2) Tax applies to charges for training materials, including books, furnished to trainees for a charge separate
from the charge for training services.
(3) Where a person sells tangible personal property, such as computers or programs, and provides training
materials to the customer without making an additional charge for the training materials, this is a sale of the training
materials. The selling price of the training materials is considered to be included in the sales price of the tangible
personal property.
(f) COMPUTER PROGRAMS.
(1) PREWRITTEN (CANNED) PROGRAMS. Prewritten programs may be transferred to the customer in the
form of storage media or by listing the program instructions on coding sheets. In some cases they are usable as
written; however, in other cases it is necessary that the program be modified, adapted, and tested to meet the
customer鈥檚 particular needs. Tax applies to the sale or lease of the storage media or coding sheets on which or into
which such prewritten (canned) programs have been recorded, coded, or punched.
(A) Tax applies whether title to the storage media on which the program is recorded, coded, or punched
passes to the customer, or the program is recorded, coded, or punched on storage media furnished by the customer.
The temporary transfer of possession of a program, for a consideration, for the purpose of direct use or to be
recorded or punched by the customer, or by the lessor on the customer鈥檚 premises, is a lease of tangible personal
property. The tax applies unless the property is leased in substantially the same form as acquired by the lessor and
the lessor has paid sales tax reimbursement or use tax with respect to the property.
(B) Tax applies to the entire amount charged to the customer. Where the consideration consists of license
fees, all license fees, including site licensing and other end users fees, are includable in the measure of tax. Tax
does not apply, however, to license fees or royalty payments that are made for the right to reproduce or copy a
program to which a federal copyright attaches in order for the program to be published and distributed for a
consideration to third parties, even if a tangible copy of the program is transferred concurrently with the granting of
such right. Any storage media used to transmit the program is merely incidental.
(C) Maintenance contracts sold in connection with the sale or lease of prewritten computer programs
generally provide that the purchaser will be entitled to receive, during the contract period, storage media on which
prewritten program improvements or error corrections have been recorded. The maintenance contract also may
provide that the purchaser will be entitled to receive, during the contract period, telephone or on-site consultation
services.
If the purchase of the maintenance contract is not optional with the purchaser, that is, if the purchaser must purchase
the maintenance contract in order to purchase or lease a prewritten computer program, then the charges for the
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Regulation 1502. (Continued)
maintenance contract are taxable as part of the sale or lease of the prewritten program. Tax applies to any charge
for consultation services provided in connection with a maintenance contract except as provided below.
For reporting periods commencing on or after January 1, 2003, if the purchase of the maintenance contract is
optional with the purchaser, that is, if the purchaser may purchase the prewritten software without also purchasing the
maintenance contract, and there is a single lump sum charge for the maintenance contract, 50 percent of the lump
sum charge for the maintenance contract is for the sale of tangible personal property and tax applies to that amount;
the remaining 50 percent of the lump sum charge is nontaxable charges for repair.
If no tangible personal property whatsoever is transferred to the customer during the period of the maintenance
contract, tax does not apply to any portion of the charge. Tax does not apply to a separately stated charge for
consultation services if the purchaser is not required to purchase those services in order to purchase or lease any
tangible personal property, such as a prewritten computer program or a maintenance contract.
(D) The sale or lease of a prewritten program is not a taxable transaction if the program is transferred by
remote telecommunications from the seller鈥檚 place of business, to or through the purchaser鈥檚 computer, and the
purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction.
Likewise, the sale of a prewritten program is not a taxable transaction if the program is installed by the seller on the
customer鈥檚 computer except when the seller transfers title to or possession of storage media or installation of the
program is a part of the sale of the computer.
If the transfer of a prewritten program is a nontaxable transaction, then the seller is the consumer of tangible personal
property used to produce written documentation or manuals (including documentation or manuals in machine-
readable form) designed to facilitate the use of the program and transferred to the purchaser for no additional charge.
If a separate charge is made for the documentation or manuals, then tax applies to the separate charge.
(E) The transfer of a prewritten program on storage media is not a sale for resale when the storage media,
or an exact copy, will be used to produce additional copies of the program.
Charges for testing a prewritten program on the purchaser鈥檚 computer to insure that such a program operates as
required are installation charges and are nontaxable.
(2) CUSTOM PROGRAMS
(A) Tax does not apply to the sale or lease of a custom computer program, other than a basic operational
program, regardless of the form in which the program is transferred. Nor does the tax apply to the transfer of a
custom program, or custom programming services performed, in connection with the sale or lease of computer
equipment, whether or not the charges for the custom program or programming are separately stated.
(B) However, charges for custom modifications to prewritten programs are nontaxable only if the charges
for the modifications are separately stated. Otherwise, the charges are taxable as part of the sale of the prewritten
program.
When the charges for modification of a prewritten program are not separately stated, tax applies to the entire charge
made to the customer for the modified program unless the modification is so significant that the new program
qualifies as a custom program. If the prewritten program was previously marketed, the new program will qualify as a
custom program, if the price of the prewritten program was 50 percent or less of the price of the new program. If the
prewritten program was not previously marketed, the new program will qualify as a custom program if the charge
made to the customer for custom programming services, as evidenced in the records of the seller, is more than 50
percent of the contract price to the customer.
(C) Charges for any written documentation or manuals designed to facilitate the use of a custom computer
program by the customer are nontaxable, whether separately stated or not. The vendor of the custom computer
program is the consumer of the written documentation or manuals, or of any tangible personal property used by the
vendor in producing the written documentation or manuals.
(D) A custom computer program includes a program prepared to the special order of a customer who will
use the program to produce and sell or lease copies of the program, and the charge for such custom computer
program is not subject to tax. Sales or leases of the copies, however, are taxable as sales of prewritten computer
programs.
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Regulation 1502. (Continued)
(E) A computer program prepared to the special order of a customer to operate for the first time in
connection with a particular basic operating system is a custom computer program even though a different version
currently operates in connection with an incompatible basic operating system.
(F) Digital pre-press instruction is a custom computer program under section 6010.9 of the Revenue and
Taxation Code, the sale of which is not subject to tax, provided the digital pre-press instruction is prepared to the
special order of the purchaser. Digital pre-press instruction shall not, however, be regarded as a custom computer
program if it is a 鈥渃anned鈥? or prewritten computer program which is held or existing for general or repeated sale or
lease, even if the digital pre-press instruction was initially developed on a custom basis or for in-house use. The sale
of such canned or prewritten digital pre-press instruction in tangible form is a sale of tangible personal property, the
retail sale of which is subject to tax.
(g) SERVICE CHARGES. The following activities are service activities. Charges for the performance of such
services are nontaxable unless the services are performed as a part of the sale of tangible personal property.
(1) Designing and implementing computer systems (e.g., determining equipment and personnel required and
how they will be utilized).
(2) Designing storage and data retrieval systems (e.g., determining what data communications and high-speed
input-output terminals are required).
(3) Consulting services (e.g., study of all or part of a data processing system).
(4) Feasibility studies (e.g., studies to determine what benefits would be derived if procedures were automated).
(5) Evaluation of bids (e.g., studies to determine which manufacturer鈥檚 proposal for computer equipment would
be most beneficial).
(6) Providing technical help, analysts, and programmers, usually on an hourly basis.
(7) Training Services.
(8) Maintenance of equipment. (See Regulation 1546 for application of tax to maintenance contracts.)
(9) Consultation as to use of equipment.
(h) PICK-UP AND DELIVERY CHARGES. If the data processing firm鈥檚 billing is for nontaxable processing of
customer-furnished information, the tax will not apply to pick-up and delivery charges. If pick-up and delivery charges
are made in conjunction with the sale of tangible personal property or the processing of customer-furnished tangible
personal property, the tax will apply to the pick-up charges. Tax will apply to the delivery charges to the extent
specified in Regulation 1628, 鈥淭ransportation Charges.鈥?
(i) RENTAL OF COMPUTERS. A lease includes a contract by which a person secures for a consideration the use
of a computer which is not on his or her premises, if the person or his or her employees, while on the premises where
the computer is located operate the computer, or direct and control its operation. A lease does not include a contract
whereby a person secures access by means of remote telecommunication to a computer which is not on his or her
premises, if the person or his or her employees operate the computer or direct and control its operation by means of
remote telecommunication. (See Regulation 1660 for application of tax to leases.)
History: Adopted February 17, 1972, effective March 25, 1972.
Amended November 18, 1987, effective March 4, 1988. In subdivision (b), amended the regulation to conform several definitions with
industry standards. In subdivision (c), amended the regulation to make clear and specific the basic application of tax. In subdivision (f),
amended the regulation to make clear and specific the application of tax to prewritten computer programs.
Amended June 24, 1998, effective January 29, 1999. Subdivision (b) amended to delete last sentence and add new second sentence.
Subdivision (f)(1)(D) amended to add new last sentence.
Amended September 1, 1999, effective December 3, 1999. Subdivision (b)鈥揹efinition "Electronic or Pre-Press Instruction" added.
Language added to subdivision (c)(4) and to (d)(5)(B)4 emphasizing that only the sale of digital pre-press instructions that qualify as
custom computer programs may be non-taxable. Also added to the last sentence in subdivision (d)(5)(B), language to harmonize
Regulation 1502 with a simultaneous change to Regulation 1541 concerning customer furnished information; also added an example
that with respect to typography, clip art and text combined on the same page is considered composed type. New subdivision (f)(2)(F)
added.
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Regulation 1502. (Continued)
Amended September 11, 2002, operative January 1, 2003. Word 鈥減aragraph鈥? changed to 鈥渟ubdivision鈥? throughout. Word 鈥渟ubdivision鈥?
added before, and words 鈥渁bove鈥? and 鈥渂elow鈥? deleted after, subdivision numbers in cross references. Word 鈥渟ection鈥? deleted
throughout. Word 鈥渆xempt鈥? replaced with 鈥渘ontaxable鈥? throughout. Subdivision (b)- list reformatted as separate subdivisions (1)-(13);
titles in all new subdivisions capitalized; substance of former un-numbered paragraph, regarding electronic or digital pre-press
instructions, transferred to new subdivision (b)(6) and re-written to conform to recent amendments to Regulation 1540 and 1541 in this
area with title 鈥淓lectronic or Digital Pre-Press Instruction鈥? changed to 鈥淒IGITAL PRE-PRESS INSTRUCTION鈥? and words 鈥渆lectronic or鈥?
deleted throughout accordingly; definitions for 鈥淜eystroke,鈥? 鈥淥ff-line,鈥? and 鈥淥n-line,鈥? deleted; cross-reference to subdivision (d)(5)
deleted. Subdivision (d)(3)- word 鈥渞egardless鈥? deleted and words 鈥渙r not鈥?, 鈥淔or the S鈥?, and 鈥渢he鈥? added. Subdivision (d)(5)- subdivision
(C)- 鈥渞endition鈥? replaced with 鈥渞endering.鈥? Subdivision (f)(1)(C)- in first un-numbered paragraph, phrase 鈥渢hat 鈥? program鈥? and new
second sentence added and phrase 鈥渋ncluding 鈥? services鈥? deleted. Second un-numbered paragraph replaced with new second and
third un-numbered paragraphs. Subdivision (f)(2)(B)- word 鈥渟ervices鈥? deleted for clarity, and 鈥?%鈥? replaced with 鈥減ercent.鈥? Subdivision
(f)(2)(C)- 鈥淎ny鈥? replaced with 鈥淐harges for any鈥?; words 鈥渟eparately stated鈥? added and phrase 鈥渁 鈥? manuals鈥? deleted. Subdivision
(f)(2)(D)- phrase 鈥渁nd 鈥? tax鈥? added to first sentence; 鈥淭he鈥? replaced with 鈥淪ales or leases of the鈥? and words 鈥渟ales of鈥? added to second
sentence, and third sentence deleted. Subdivision (f)(2)(F)- current language replaced with new language to conform the definition of
digitized pre-press instructions to that promulgated in recent amendments to Regulations 1540 and 1541. Subdivision (g)- gender-
neutral language added.
Regulations are issued by the State Board of Equalization to implement, interpret or make specific
provisions of the California Sales and Use Tax Law and to aid in the administration and enforcement
of that law. If you are in doubt about how the Sales and Use Tax Law applies to your specific activity
or transaction, you should write the nearest State Board of Equalization office. Requests for advice
regarding a specific activity or transaction should be in writing and should fully describe the facts and
circumstances of the activity or transaction.
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