Taxing Tech A Reed Smith State Tax Blog on the Taxation of Emerging Technologies

The Nortel Dilemna: Taxability of Canned Software in California

Posted in Uncategorized

In an article published in this week’s BNA Weekly State Tax Report, Marty Dakessian, Mike Shaikh and I analyze last year’s decision of the California Court of Appeal (2nd District) in Nortel Networks Inc. v. State Board of Equalization, 191 Cal. App. 4th 1259 (Cal. Ct. App. 2011), holding that sales of prewritten software fall within California’s sales and use tax exemption for transfers of intangible property pursuant to a technology transfer agreement, or TTA).

Our conclusion:

Even though Nortel is now final, the SBE continues to resist applying the TTA exemption to prewritten software and has imposed requirements intended to frustrate and deter taxpayers from seeking the refunds to which they are legally entitled. However, pending court cases, potential regulatory changes, and possible future cases will clarify what the Nortel decision really means. Until then, the best course of action for taxpayers that have paid California sales tax on software subject to a patent or copyright is to continue filing refund claims to protect their rights. 
Our previous coverage of Nortel can be found here