California Court Holds Software Agreements Exempt From Sales

On September 27, 2013, the California Superior Court ruled in a summary judgment that software agreements to operate telephone switching equipment were qualified technology transfer agreements (TTAs) and exempt from sales tax under California statutes.1 Thus, the taxpayer was entitled to a refund of more than $24 million in sales and use tax. In its determination, the Superior Court noted that the facts in this case were indistinguishable from those at issue in the California Court of Appeal's decision in Nortel Networks.2 In that decision, software licensed by Nortel and included in its telephone switching equipment was determined to be exempt from sales tax under the TTA statutes.

Background

Lucent, a global supplier of products and services supporting landline and wireless telephone services, the Internet, and other public and private data, voice, and multimedia communications networks using terrestrial and wireless technologies, manufactured and sold switching equipment to its telephone customers. The equipment allowed the customers to provide telephone calling and other services to the end customers. In order to operate the switches, software provided on storage media was transferred to the telephone customers pursuant to written agreements.

The issues considered by the court were whether the software agreements at issue were TTAs as a matter of law, and if so, whether there was a triable issue of fact as to the amount of the refund due to Lucent based on the value of the tangible personal property transferred.

Licensing Agreement Is Defined Technology Transfer Agreement

In California, a transfer of intangible personal property is not subject to sales tax. Intangible personal property is defined as property that is a "right" rather than a physical object.3 Intellectual property is an intangible right that exists separately from the physical medium that embodies it. Intangible property includes a license to use information under a copyright or patent.4 Additionally, TTA provisions exempt from taxation "the amount charged for intangible personal property transferred with tangible personal property in any technology transfer agreement, if the technology transfer agreement separately states a reasonable price for the tangible personal property."5 If a reasonable price for the tangible personal property element is not separately stated, two alternative methods for valuation must be considered.6

The statutory definition of a TTA is met if...