## Facts

- Dell, Inc. sold computers and related items to consumers in “standard packages” that included tangible hardware, software, a warranty, and an optional service contract.
- Dell offered the package to customers for a single, lump-sum price. On customer invoices, Dell itemized components but did not list separate prices for each component.
- Internally, Dell assigned specific prices to individual components (including the service contract) and maintained those prices in price lists and databases.
- Customers could decline the standard service contract and pay a reduced total price, or they could upgrade to a more expensive extended-service contract.
- Dell collected and remitted California sales tax on the entire lump-sum package price, which effectively imposed tax on the service-contract portion as well as on the computer hardware.
- California’s sales and use taxes apply to retail sales and use of tangible personal property, not to services or intangible property.
- Consumer plaintiffs (including Diane Mohan and DeMarco Enterprises, Inc.) sued Dell in San Francisco Superior Court, alleging Dell unlawfully collected tax on non-taxable service contracts and asserting statutory consumer and unfair-competition theories.
- Dell filed a cross-complaint against the California State Board of Equalization (SBE), seeking a refund of the taxes it had remitted to the SBE that were attributable to the challenged service-contract charges.
- The parties agreed to a bench trial on a discrete question: whether Dell’s sales of optional service contracts to plaintiffs were subject to California sales or use tax.
- The trial court concluded the service-contract sales were not taxable.
- Dell petitioned the California Court of Appeal for a writ of mandate seeking review and reversal of the trial court’s determination.

## Issues

1. Whether optional service contracts sold with Dell computers are subject to California sales or use tax when the computer package is sold for a single lump-sum price and the invoice does not separately state the service-contract charge.
2. Whether the service contracts should be treated as taxable as part of a single “inseparable” package transaction, or treated as separate, non-taxable services with an ascertainable value.

## Decision

- The Court of Appeal denied the petition for writ of mandate.
- The court upheld the trial court’s conclusion that Dell’s optional service contracts were not subject to California sales or use tax, even when sold concurrently with taxable computer hardware for an aggregate price.
- The court rejected Dell’s and the SBE’s argument that bundled, lump-sum pricing (and the lack of a separately stated invoice price) makes the non-taxable service component taxable.
- The court reasoned that the computers and the service contracts were distinct consumer items, each a significant object of the transaction, and the service contracts had readily ascertainable value based on Dell’s internal pricing and customer options (decline or upgrade).

## Legal Principles

- California sales and use taxes apply to retail sales and use of tangible personal property, not to the performance of services or transfers of intangible property (Rev. & Tax. Code §§ 6051, 6201).
- In a transaction involving both taxable and non-taxable elements, taxability depends on what is being sold and whether the non-taxable element is merely incidental to the taxable sale; it does not depend solely on whether charges are separately stated on a customer invoice.
- Optional service contracts that are separate items of value and a meaningful object of the purchase remain non-taxable services even if sold at the same time as tangible personal property for a single total price.
- The ability to identify the value of a service component (including through internal price lists, databases, and customer options to remove or upgrade the service) supports treating the service as a separate, non-taxable item rather than merging it into the taxable price of tangible goods.
- In writ proceedings challenging a trial court’s legal determination, mandate relief is not appropriate where the trial court correctly applied the governing tax rules to the transaction shown by the record.

## Conclusion

The Court of Appeal denied Dell’s request for mandate relief and left standing the trial court’s ruling that Dell’s optional computer service contracts were not subject to California sales or use tax, even though Dell sold the computer and service contract together for a lump-sum price without separately stating the service-contract charge on the invoice, because the service contracts were distinct, optional items with ascertainable value rather than incidental components of a taxable sale of tangible property.


Dell, Inc. v. Superior Court, 159 Cal. App. 4th 911, 71 Cal. Rptr. 3d 905 (2008)