California: How to Tax Computers, Programs and Data Processing
- Mar 20, 2014 | Gail Cole
The California State Board of Equalization has adopted amendments to Regulation 1502, Computers, Programs, and Data Processing. The goal is to eliminate confusion by clarifying how tax applies to the sale or lease of prewritten programs and optional maintenance contracts. Amendments to Regulation 1502 take effect July 1, 2014.
Regulation 1502 spans 10 pages and describes in detail numerous data processing services and the taxation (or exemption) thereof. The amendment impacts section f, Computer Programs, 1C:
“Maintenance contracts sold in connection with the sale or lease of a prewritten computer program 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 contracts may provide that the purchaser is entitled to receive storage media on which a backup copy of the same or similar prewritten program is recorded, so that the purchaser may use the backup copy to restore the prewritten program…” (underlined portion is new).
If the purchase of the maintenance contract is not optional, then charges for the maintenance contract are subject to sales tax. If the maintenance contract is optional and if there is a single lump sum charge for the maintenance contract, then “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.”
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Read more about California Regulation 1502.