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Software Sales Tax Debate

3 Oct 2012

Last year's Nortel Networks decision spurred a spate of optimism and activity surrounding potential sales tax refund opportunities and planning considerations for certain transfers of prewritten software. To the consternation of industry groups, however, the California State Board of Equalisation (SBE), while acknowledging some of the favorable aspects of Nortel, has posited interpretations that would severely limit its applicability. Taxand USA investigates taxation issues surrounding the retail of software.

The SBE states that if a company holds patent or copyright interests in non-custom software and they make retail sales of the software on tangible media, then a portion of the proceeds from their retail sales may be excluded from their gross receipts, subject to sales tax. Likewise, if a company purchases non-custom software on tangible media in a transaction that is subject to use tax from a retailer who holds patent or copyright interests in the software, then a portion of the price paid for the software may be excluded from the sales price of the software that is subject to use tax.

However, following the Nortel decision, the SBE issued a news release claiming that Nortel does not affect sales tax imposed on off-the-shelf software because the typical retailer does not hold copyright or patent interests. Therefore, for an agreement to qualify as a Technology Transfer Agreement (TTA), the retailer must be able to provide documentation from the US Patent and Trademark Office documenting that the retailer obtained the patent to establish original ownership or authorship of the copyrighted work.

Discover more: California software sales tax debate

Taxand's Take

While industry groups are unhappy with the SBE's current party line, which must in part be motivated by their soon-to-be-heard defenses in the upcoming Lucent cases, the Nortel case has indeed provided opportunities for refunds and planning. Before new regulations are published (post the Lucent cases) companies who have filed protective refund claims may wish to add another year, before the statue of limitations runs out.

Your Taxand contact for further queries is:
Tony Fuller
T. +1 415 490 2256

Taxand's Take Author