For iPad devotees, California’s timing couldn’t be better. As the world (including, admittedly, the editors of this blog) await with baited-breath the possible news from Apple this morning on the next generation of its iPad tablet, the California State Board of Equalization has issued revised guidance on the taxability of internet sales, including downloads of applications (“apps”), eBooks, digital images, and software.

Publication No. 109 (March 2, 2012) clarifies that:

  • If you are a California business that makes sales of physical products, your sales will be subject to tax just as if you sold them in a store;
  • If you are a non-California business that makes sales of physical products that has a permanent or temporary business location in the state or uses a representative or agent in the state, you must collect and remit sales tax as if your customers purchased those items in your store (see P.L. 86-272);
  • If you are either a California or non-California business and you sell electronic data products, including: software, data, digital books (eBooks), mobile applications (“apps”), or digital images, your sales will not be subject to tax unless as part of the sale you provide the customer with a back up data copy on a physical storage medium such as a CD-ROM; and
  • If you are either a California or non-California business and you sell canned (read: non-custom; “out-of-the-box”) software to customers who download the software from a server, your sales will not be subject to tax unless as part of the sale you provide the customer with a back up data copy of the software on a physical storage medium such as a CD-ROM (this also holds true if you are selling a customer a database via download).

 Most notably, the Publication goes on to note that when a consumer purchases an eBook it can do so on diskette or CD (really?), but that the most popular method of delivery of eBooks is through a mobile app (e.g., Apple’s iBooks) or other wireless download (e.g., Amazon’s Whispernet) and that these sales do not involve the transfer of a back up copy on a physical storage medium.

So, for the time being, Californians lucky enough to snag the latest device to emerge out of Cupertino can download iBooks, iTunes, and Apps sales-tax free.

And one more thing… Stay tuned for further developments in this area from California and other states. If recent history is any judge, what is a state’s policy on the taxation of digital downloads and software today is apt to change at… 4G speeds!