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Sales and Use Tax Explained

The following are provided as general guidelines in the application of Sales and Use tax. Sales and Use tax laws, regulations and more can be found on the California State Board of Equalization’s website.

Only tangible personal property is subject to sales and use tax. Services generally are not taxable unless they are related to the sale of tangible personal property (for example, assembly or fabrication labor services).

The statewide sales and use tax rate is currently 7.25%. Many counties throughout the state have additional transaction taxes (also called district taxes) which range up to 1.25%. District taxes are generally applied based on the place where the item was received.

Sales tax generally applies to transactions within California. If a sale originates in California, and possession of the item is taken in California, then sales tax applies. There are cases where a vendor based out of state has business ties to California, and they are also required to charge sales tax. For example, an online seller may also have stores located within California. Sales tax is paid to the vendor, who is responsible for remitting the tax to the California State Board of Equalization (SBE).

Use tax is to be paid by any purchaser who stores, uses, or consumes within the state any tangible personal property purchased from an out-of-state seller (unless the vendor charges sales tax, as stated above). Use tax was created to protect California vendors from unfair out-of-state competition. The buyer is responsible for remitting use tax to the State Board of Equalization.

Transactions between the university and another government entity are not taxable (this includes the US government, other State of California agencies, agencies of other states or of foreign governments).

Items delivered to points outside California and functionally used outside the state for more than 90 days are exempt from California sales and use tax.

Common carrier transportation charges from a vendor to a purchaser are not taxable if the charges are separately stated. Common carriers include UPS, FedEx, US Mail, freight lines, etc. Sometimes common carriers add a hazard charge, insurance charge, or something similar, none of which are taxable.

Delivery charges are taxable when a vendor uses their own vehicle to deliver the item purchased. For example, if Sears delivers a refrigerator.

Handling charges are taxable. Shipping and handling charges when billed as a lump sum are treated as taxable, even though the actual shipping charges are not technically taxable.

Fabrication labor is taxable. By definition, a fabrication creates a new item or changes the function of an existing item.

Assembly labor is taxable. Assembly is considered to be the final step in the production process.

Installation labor is not taxable. Installation involves placing an item into position for it to function.

Repair labor is not taxable if separately stated. A repair returns an existing item to its original condition. Repair parts and materials, however, generally are taxable. It is best to ask that the labor and parts be itemized separately. If the two are not stated separately, then the total amount is taxable.

Scholarly journal and reprints page charges are not taxable. We are paying a journal to publish our scientific article, so this is more like a service.

Reprints are taxable tangible personal property, unless there is an exemption that applies (e.g. purchase for resale).

Mandatory maintenance agreements are taxable. If a buyer is required to purchase the agreement, the price of the agreement is considered to be part of the selling price of the equipment.

Optional maintenance agreements are not taxable.

Software can be purchased outright. Software also can be acquired via a software license agreement that, depending on agreement terms, is considered to be a purchase or a lease. In general the same rules apply to software purchases and software license agreements.

Custom software and license agreements are not taxable. Custom software is a computer program created and tailored specifically for a customer. This also includes modifications of canned software at a charge of 50% or more over its original purchase price.

Canned software and license agreements are taxable if delivered via tangible media, such as diskette or cd-rom. Canned software is not taxable if delivered electronically or loaded by the vendor. Canned software is a pre-written program developed for general or repeated sale or lease.

Custom software maintenance agreements are not taxable. This applies to both optional and mandatory agreements.

Canned software mandatory maintenance agreements are considered to be part of selling price of the software itself and are taxed accordingly (see above).

Canned Software Optional Maintenance Agreements, Lump-Sum All-Inclusive are taxable if we receive tangible media; e.g., tape, disk, diskette, cd-rom, etc.

Canned Software Optional Maintenance Agreements, "Cafeteria Plan" may or may not be taxable. Telephone support is not taxable. Software updates in the form of tangible media are taxable.

Internet sales are currently subject to the same tax rules as transactions made in a store or from a catalog.

Purchases for the purpose of resale are exempt from both sales and use tax. It is our responsibility to collect sales tax from our customer unless an exemption applies.

Purchases of tangible personal property with a federal grant fund are taxable unless the grant award document has a specific clause passing title to the federal government at the time of acquisition.

Questions about Sales and Use taxes can be directed to Anne Marie Scott, (530) 757-8505 or ascott@ucdavis.edu.