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Business Taxes Law Guide—Revision 2024
Sales And Use Tax Law
Revenue and Taxation Code
Division 2. Other Taxes
Part 1. Sales and Use Taxes
Chapter 1. General Provisions and Definitions
Section 6010.9
6010.9. "Sale" and "purchase"; custom computer program. "Sale" and "purchase," for the purposes of this part, do not include the design, development, writing, translation, fabrication, lease, or transfer for a consideration of title or possession, of a custom computer program, other than a basic operational program (as defined in Section 995.2), either in the form of written procedures or in the form of storage media on which, or in which, the program is recorded, or any required documentation or manuals designed to facilitate the use of the custom computer program so transferred.
As used in this section:
(a) "Storage media" includes punched cards, tapes, discs, diskettes, or drums on which computer programs may be embodied or stored.
(b) "Computer" does not include tape-controlled automatic drilling, milling, or other manufacturing machinery or equipment.
(c) "Computer program" means the complete plan for the solution of a problem, such as the complete sequence of automatic data-processing equipment instructions necessary to solve a problem and includes both systems and application programs and subdivisions, such as assemblers, compilers, routines, generators, and utility programs.
(d) "Custom computer program" means a computer program prepared to the special order of the customer and 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. The term does not include a "canned" or prewritten computer program which is held or existing for general or repeated sale or lease, even if the prewritten or "canned" program was initially developed on a custom basis or for in-house use. Modification to an existing prewritten program to meet the customers needs is custom computer programming only to the extent of the modification.
History—Added by Stats. 1982, Ch. 1274, in effect September 22, 1982.
Note.—Stats. 1982, Ch. 1274, Sections 48 provided, "The Legislature finds and declares that sales and service of custom computer programs, as defined in Section 6010.9 of the Revenue and Taxation Code, other than basic operational programs, are service transactions not subject to sales or use taxes under any existing state law. The use of any storage media in the transfer of custom computer programs is only incidental to the true object of the transaction, which is the performance of a service. Therefore, the Legislature, consistent with the statement of intent in Chapter 165 of the Statutes of 1972, declares that Section 2 of this act is declaratory of, and not a change in, existing law. It is the intent of the Legislature in enacting this act to clarify the existing law and to affect all applicable pending proceedings."
"The Legislature further finds and declares that there presently is uncertainty in the application of sales and use tax to the sales and service of custom computer programs which this act is intended to clarify, and this uncertainty has resulted in incorrect payment of sales and use tax by some taxpayers and the incorrect assessment of deficiencies of sales and use tax against some taxpayers."
"For the public purpose of assuring equity in the payment of sales and use taxes among retailers selling and servicing custom computer programs, any outstanding and unpaid deficiency assessments are hereby canceled, and any sales and use taxes which have been incorrectly paid by retailers on or after July 1, 1972, shall be refunded in accordance with the provisions of this act, notwithstanding any other provision of law. Claims for refund by the retailer pursuant to this act shall only be submitted for, and shall distinguish between, the following:
(a) Taxes, interest, and any penalty incorrectly paid for which there was no customer reimbursement.
(b) Taxes incorrectly paid for which there was customer reimbursement and for which the retailer can and will return incorrectly paid taxes to customers who reimbursed the retailer.
(1) The retailer shall return to a customer reimbursement paid by that customer in proportion to the amount of refund received for those paid taxes.
(2) Any taxes refunded to the retailer that have not been returned to the customer within 60 days of the receipt of the refund shall be returned to the state."
"On or before December 15, 1982, any person claiming a refund of sales and use taxes as provided in Section 5 of this act shall file a claim for refund with the State Board of Equalization in such form as the board may prescribe. Any person who fails to file a claim by December 15, 1982, as provided in this section, shall have no right to a refund, notwithstanding any other provision of law."
"On or before July 1, 1983, the State Board of Equalization shall certify to the Controller the amount of refund due to each claimant pursuant to this act. The total amount of money to be available for refunds pursuant to this act shall not exceed one million two hundred thousand dollars ($1,200,000). If the total amount of claims exceeds one million two hundred thousand dollars ($1,200,000), the board shall determine the pro-rata share due each claimant based on the proportion each claim bears to the total amount of claims and shall report that amount for certification."
"No interest shall be paid on any refund of taxes made pursuant to this act."
"It is the intent of the Legislature in enacting this act that the refund provisions in this act shall supercede the provisions of Chapter 7 (commencing with Section 6901) of Part 1 of Division 2 of the Revenue and Taxation Code and to make the provisions of this act the exclusive procedure and remedy for the claim of, or action for, a refund of sales and use taxes on the sale or service of custom computer programming, as defined in Section 6010.9 of the Revenue and Taxation Code."
Note.—Section 148.5 of Stats. 1983, Ch. 323, in effect July 21, 1983, amended Section 7 of Stats. 1982, Ch. 1274, to provide "To the extent money is appropriated in the Budget Act of 1984, for the purposes of making the refunds pursuant to this act, the refunds pursuant to this act shall be paid by September 15, 1984." Custom Computer Programs on Punch Cards.Transfers of custom computer programs on punch cards were nontaxable services, as clarified by 1982 legislation. General Business Systems, Inc. v. State Board of Equalization (1984) 162 Cal.App.3d 50.
Custom computer programs not exempt when resold.Once a computer program has been created and is in possession of the original customer, a subsequent sale can no longer be characterized as a tax exempt service transaction. Touche Ross and Co. v. State Board of Equalization (1988) 203 Cal.App.3d 1057. Programs developed for in-house use not custom when sold.Taxpayer developed a program for its own in-house use, and the program was thereafter sold. It was not developed and sold as a custom program for the purchaser. Rather, this was a taxable sale of a pre-existing program. It is irrelevant that it was not a "canned" program. Navistar Internat. Transportation Corp. v. State Board of Equalization (1994) 8 Cal.4th 868.