The California State Board of Equalization (BOE or SBE) was handed a defeat by the California Appellate Court in Dell Inc. v. Superior Court of San Francisco 159 Cal.App.4th 911 (2008) . The court held that the value of the Dell service contracts purchased by consumers was not subject to California Sales Tax even though the price of the contract was not separately stated in the invoice. The case has potentially wide reaching application to other California sales tax audits.
The facts in Dell indicated that the service contracts were optional, and that they were priced separately from the underlying computer equipment. For example, a consumer purchasing a computer could check a box on Dell’s website to add a service contract for an additional $x. The amount would be added to the purchase price but the invoice issued to the customer would indicate a lump sum price for the computer and the service contract. Everyone agreed that if sold separately the service contracts were intangible property, not subject to California sales tax. It was also agreed that if the Dell service contracts were sold with computers they would not be subject to California sales tax provided that the price of the sales contract is separately stated in the invoice or other contract of sale.
The BOE argued, however, that in the absence of a separate statement of the charge for the service contracts they are subject to California sales tax. The Court disagreed, and found that the transaction was a “mixed transaction” involving separately identifiable transfers of goods and services. It differentiated the sale from a “bundled transaction” involving goods and services that are inextricably intertwined in a single sale. As such as long as the value of the separable identified parts can be established then the value attributable to the transfer of intangible property or services is not subject to California sales tax.