United States

California: Supreme Court Denied Review of Lucent Decision Addressing Taxability of Software Transferred via a Technology Transfer Agreement

Feb 01, 2016
From KPMG TaxWatch

Loading the player...

Last year in Lucent Technologies Inc. v. State Board of Equalization, a California Court of Appeal ruled that software licenses transferred with telecommunications switching equipment were exempt from sales and use tax. The court determined that the licenses were exempt because they were transferred as part of a Technology Transfer Agreement or TTA. The State Board of Equalization (Board) then appealed the ruling to the California Supreme Court.  On January 20, 2016, the California Supreme Court declined to review the decision. The Board then announced that it is considering how to implement Lucent. According to the Board, nearly 900 technology companies have filed refund claims that have been held in abeyance during the appeal.

The taxpayer at issue in Lucent manufactured switching equipment and licensed software that enabled customers to operate the switching equipment. Specifically, customers that purchased equipment and software from the taxpayer also received the right to copy the software onto hard drives to operate the switching equipment. Under California law, sales and use tax does not apply to intangible personal property transferred with tangible personal property as part of a TTA. However, sales tax does apply to the tangible portions of the transaction. A TTA is broadly defined as “any agreement under which a person who holds a patent or copyright interest assigns or licenses to another person the right to make and sell a product or to use a process that is subject to the patent or copyright interest.”

At issue in Lucent was whether the software licenses were taxable, or exempt, from sales and use tax because they were sold under a TTA. The appeals court, affirming the trial court, ruled that the software licenses were exempt because they were transferred as part of a TTA. Notably, the Lucent case was indistinguishable from an earlier case, Nortel, where an appellate court likewise held that a taxpayer’s software licensing agreements constituted TTAs. The appeals court also affirmed the trial court’s decision to award the taxpayer “reasonable litigation costs” of over $2.5 million. In the court’s view, this award was proper because the Board’s position in the litigation was not substantially justified. Please contact Chris Craft at 858-750-7301 with questions on the ramifications of the Lucent decision.

For more information about TWIST or to view archived episodes, please visit our TWIST homepage.

 Subscribe to TWIST via iTunes, or  Subscribe via RSS.

To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.

The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.