# Sales Tax on FSD upgrade



## Ken Voss (Feb 2, 2017)

I purchased EAP when I took delivery almost a year ago and I just pulled the trigger on the $2,000 FSD upgrade. In addition to the $2,000, I was charged sales tax on this order but in California, downloaded software is exempt from sales tax. Any sales tax experts out there know how to deal with this?


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## Ken Voss (Feb 2, 2017)

raptor said:


> Only issue I can think of is that FSD does include a hardware upgrade.


No, it is absolutely NOT being sold as hardware. It is being sold strictly as downloaded software with a free hardware upgrade sometime in the future. They would need to sell the hardware for $2,000 and give you free software to charge sales tax on this.


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## wokuku (Dec 17, 2018)

Interesting...I just checked all my Steam purchases and none of them have sales tax.


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## Unplugged (Apr 5, 2016)

Ken Voss said:


> I purchased EAP when I took delivery almost a year ago and I just pulled the trigger on the $2,000 FSD upgrade. In addition to the $2,000, I was charged sales tax on this order but in California, downloaded software is exempt from sales tax. Any sales tax experts out there know how to deal with this?


Let us know about your experience in contesting the tax assessed by Tesla. I can't think of a reason why Tesla would believe that the software update is a taxable item. I'm going to pay the full $5,000 for AP and FSD. I better not get taxed $387.

Here is the applicable language from the California State Board of Equalization:

*Products electronically transmitted to customers*

Your sale of electronic data products such as software, data, digital books (eBooks), mobile applications, and digital images is generally not taxable when you transmit the data to your customer over the Internet or by modem. However, if as part of the sale you provide your customer with a printed copy of the electronically transferred information or a backup data copy on a _physical storage medium_ such as a CD-ROM, your entire sale is usually taxable.

An eBook is an _electronic_ version of a traditional print book that can be read by using a tablet computer or by using an eBook reader. Users can purchase an eBook on diskette or CD, but the most popular method of getting an eBook is to purchase a downloadable file of the eBook without purchasing any physical storage medium. A mobile application, also known as a "mobile app", is computer software designed for use on a smartphone or tablet computer. The transfer of a downloadable file such as an eBook or an "app" without purchasing any physical storage medium is not a taxable transaction.

If your company sells canned (noncustom) software programs to customers who download them from a server, those sales are generally not subject to tax.

http://www.boe.ca.gov/formspubs/pub109/


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## Kizzy (Jul 25, 2016)

But, it’s possible that you could acquire this software on tangible medium (the car) and pay for it later (activation).


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## Ken Voss (Feb 2, 2017)

Kizzy said:


> But, it's possible that you could acquire this software on tangible medium (the car) and pay for it later (activation).


When you first purchase the car it can be argued that it should be taxable because it is delivered on tangible medium (Firmware on the Car's computer). However when you download an update it is clearly not taxable (by California law). Every state is different in this regard. I have spent my career in the software technology industry and I am clear on this.

I have contacted Tesla and they have said they will pass it to the account team to look into it. I would urge others in California or in any state where sales tax on downloaded software is exempt to do the same, contact Tesla and let them know they need to fix this in their system.

I suspect their on-line order entry system simply ads sales tax to every purchase for every product in every state or province, just another example of a company that is lacking business process and is having growing pains.


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## theblindtree (May 1, 2018)

Hmm, are we sure it is software that is being downloaded, not just unlocked/activated? If so, would that skirt the possibility of it meeting the criteria for not being taxable, as your car technically already has the software "available?"


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## Ken Voss (Feb 2, 2017)

theblindtree said:


> Hmm, are we sure it is software that is being downloaded, not just unlocked/activated? If so, would that skirt the possibility of it meeting the criteria for not being taxable, as your car technically already has the software "available?"


hey @theblindtree Are you a Tesla Lawyer or with the state taxing authority? Being serious for a moment, that's a good point!


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## Long Ranger (Jun 1, 2018)

Ken Voss said:


> I suspect their on-line order entry system simply ads sales tax to every purchase for every product in every state or province, just another example of a company that is lacking business process and is having growing pains.


I think you're right. I recall when I purchased a Wall Connector last year the online system wanted to charge me sales tax even though EV charging equipment is exempt in WA. I had to buy it from my local Service Center to avoid the tax.


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## Unplugged (Apr 5, 2016)

theblindtree said:


> Hmm, are we sure it is software that is being downloaded, not just unlocked/activated? If so, would that skirt the possibility of it meeting the criteria for not being taxable, as your car technically already has the software "available?"


It is definitely a downloaded item for purchase. A battery with a larger capacity can be "unlocked" for additional capacity. But, as Tesla explains, the Model 3 hardware has been already installed, it is just the software that needs to be updated.

I did just have a chat with Tesla and the agent explained the tax as follows:

_"I was able to collect some information on this, as this is something we have had inquiries about prior. It is considered a physical product, so you are paying to use hardware in the car, and we just need to send firmware to turn on that hardware. So, the money being paid is going towards the ability to use a physical product."_

This explanation makes no sense. I'll use the example that the California Board of Equalization uses:

When you buy a physical product, such as an eBook [like an Amazon Kindle reader], you pay tax on that physical item, which may even have some eBooks included that you paid tax on. When you purchase software that is transmitted by electronic delivery, you pay no tax because there is no physical product being purchased. Claiming that Tesla's firmware over-the-air purchase "turns on physical hardware" is nonsense. You already purchased the hardware, just like the eBook reader. In fact, you are already using the hardware for _other purposes_, like Sentry Mode and Blind Spot warning, etc. Just because you can now use a special key on your eBook keyboard after you purchased a software update doesn't magically transform the update into a hardware purchase. *Tesla automobile purchase = eBook purchase. Tesla firmware update = eBook electronic delivery *

When I paid Microsoft for my version 10 software, I didn't pay sales tax on the download purchase just because it gave me more ability to use a physical product. As to Tesla, I already purchased the hardware, this just unlocks the features.

Tesla needs to ask the question to the California Board of Equalization whether the software download needs to be taxed. Just because Tesla says so, isn't convincing at all. Merely unlocking features shouldn't result in taxation.


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## Unplugged (Apr 5, 2016)

Ken Voss said:


> I suspect their on-line order entry system simply ads sales tax to every purchase for every product in every state or province, just another example of a company that is lacking business process and is having growing pains.


I have a more insidious explanation: Because Tesla collects sales tax and holds it until the quarter when due (or even year-end), Tesla gets to make interest/invest those sales tax proceeds (the float). It is in Tesla's best interest to collect sales tax.


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## Ken Voss (Feb 2, 2017)

The sales tax ruling in California can not be any clearer, it is not new, has been written this way for at least a decade.. The car itself which comes equipped with all of the Hardware to enable this software was already fully taxed at purchase so if someone tells you this is tax on hardware you can call BS on them, they can not tax the same hardware twice.

This is canned software downloaded (see below) plain and simple, it is tax exempt as long as it is downloaded after purchase.


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## Unplugged (Apr 5, 2016)

Well folks. I did a little bit of research, and it seems that this California firmware update tax has been an issue ever since Tesla started offering upgrades on EAP and FSD. And since Tesla hasn't changed its mind on this, I assume Tesla won't change it after we talk to the accounting/legal team.

Whoever has a chance to communicate with Tesla, please ask them for a copy of the California Department of Tax and Fee Administration opinion letter stating that the firmware upgrade is taxable. If they don't have such an opinion letter, I don't see under what reasoning Tesla can assess the tax. I guess it could be some weird loophole such as defining the update as a vehicle option subject to tax. But that's not what their chat associate used as a justification.


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## Long Ranger (Jun 1, 2018)

Unplugged said:


> I guess it could be some weird loophole such as defining the update as a vehicle option subject to tax.


Thinking about it, I think that's actually a pretty strong argument in Tesla's favor. Tesla isn't selling you a single digital software download. They're selling a feature for the life of the vehicle. That feature might include only software downloads, but I don't think Tesla can guarantee it won't include any hardware. In fact, for FSD we know it will include hardware. AP probably won't require hardware, but Tesla is probably committing to provide new hardware if there was something like an AP recall. The law states that it's only tax exempt if you don't receive any tangible property, so FSD is taxable and AP might be a gray area.


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## theblindtree (May 1, 2018)

Ken Voss said:


> hey @theblindtree Are you a Tesla Lawyer or with the state taxing authority? Being serious for a moment, that's a good point!


I wish! (Totally joking about that!)

I just very much appreciate trying to parse out the pragmatism of certain aspects of law and it's interpretation to real-life scenarios. This is one of those that I could see it either way, but I would need more info. My theory is that they're selling you the unlock key, which wouldn't necessarily be considered "software" but rather a license.

I may be way off base though.


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## epmenard (Mar 5, 2019)

FSD payment also pays for the eventual hardware upgrade for the AP3 chip...tangible personal property!


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## SingleTrackMinded (Jul 15, 2018)

They charge sales tax for AP as well (at least for sales to customers in Arizona).


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## BluestarE3 (Oct 12, 2017)

For those who purchased a Model S with a software-limited battery pack and later paid to unlock that additional capacity, did you have to pay sales tax on that unlock? The hardware (battery cells) is already in the car at initial purchase, just as with the AP/FSD hardware.


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## Midnit3 (Oct 8, 2017)

I was charged tax and was shocked.


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## mrcndc (Mar 14, 2019)

I purchased a Model 3 RWD in Sep 2018. I live in DC. New vehicle purchases in DC are not subject to a sales tax, but they call it an excise tax (both are currently 6% same effect but different label). But EV's are exempt from this excise tax (and also get a reduced registration fee). So here is my question. Why does Tesla's web site say that if I purchase FSD for $2000 they want to also collect a $120 (6%) "sales tax?" I get that if I were to have my M3 repainted, I would get charged a 6% sales tax. But I argue that when we but a Tesla we are buying an electric vehicle that is upgradeable, those upgrades should not be charged a sales tax and are arguably exempt from excise tax. I am an attorney - it is not terminal - but sales tax law is not my expertise. I hope someone here with a tax law or accounting background can enlighten me. Thank you.


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## BluestarE3 (Oct 12, 2017)

mrcndc said:


> I purchased a Model 3 RWD in Sep 2018. I live in DC. New vehicle purchases in DC are not subject to a sales tax, but they call it an excise tax (both are currently 6% same effect but different label). But EV's are exempt from this excise tax (and also get a reduced registration fee). So here is my question. Why does Tesla's web site say that if I purchase FSD for $2000 they want to also collect a $120 (6%) "sales tax?" I get that if I were to have my M3 repainted, I would get charged a 6% sales tax. But I argue that when we but a Tesla we are buying an electric vehicle that is upgradeable, those upgrades should not be charged a sales tax and are arguably exempt from excise tax. I am an attorney - it is not terminal - but sales tax law is not my expertise. I hope someone here with a tax law or accounting background can enlighten me. Thank you.


IANAL, but maybe because it's treated as an aftermarket upgrade and not as part of the original EV purchase? Maybe you should seek an interpretation from your taxing authority and, if they rule that this should not have been taxed, you can present this to Tesla to get a refund? I suspect Tesla may have already gone down this path and was told such purchases are taxable, but it certainly doesn't hurt to find out for yourself.


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## WesternVine (Dec 4, 2018)

Long Ranger said:


> I think you're right. I recall when I purchased a Wall Connector last year the online system wanted to charge me sales tax even though EV charging equipment is exempt in WA. I had to buy it from my local Service Center to avoid the tax.


Argh. I forgot about the EV infrastructure credit in WA expiring in 2020 when I bought mine. Did you have to print out the paperwork they have to keep, or does the SC in SoDo or Bellevue often deal with that credit?


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## Long Ranger (Jun 1, 2018)

WesternVine said:


> Argh. I forgot about the EV infrastructure credit in WA expiring in 2020 when I bought mine. Did you have to print out the paperwork they have to keep, or does the SC in SoDo or Bellevue often deal with that credit?


If I remember correctly, I printed out the form ahead of time, but I don't think they needed it. They did have to do something in the computer system to remove the sales tax though. It wasn't quite as automatic as I expected.


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## Johnm6875 (Nov 14, 2016)

My FSD purchase did not include anything, really. None of the expected downloaded software and upgraded hardware exists yet. I think this may be the first time I've paid sales tax on "nothing."


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## MrMannilow (Nov 21, 2018)

epmenard said:


> FSD payment also pays for the eventual hardware upgrade for the AP3 chip...tangible personal property!


Maybe so, but it's not listed that way


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## Dr. Prunesquallor (Dec 11, 2018)

I looked back at the receipts of my software purchases over the last year (all downloaded). Weirdly, it's a mixed bag. Some have sales tax, some don't. Even my Office365 renewal was taxed. My AP and FSD were taxed. (Texas laws apply, I presume since that's my address).

I'm pretty sure AP and FSW are part of the firmware load and the "purchases" are simply activation flags. Think about the EAP trials.


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