Jarrell Cook

Technology transfer agreements topic of special hearing

By Jarrell Cook, Legislative Manager, Government Relations

Capitol Update, Jan. 27, 2017 Share this on FacebookTweet thisEmail this to a friend

The Assembly Revenue & Tax Committee will hold its first hearing on Monday, January 30, discussing “Life After Lucent:  Administering California's Technology Transfer Agreement Law.” California manufacturers should watch this discussion closely as future legislation responding to the Lucent decision to exempt software licenses from the Board of Equalization’s power to tax may affect their bottom lines.

In Lucent Technologies Inc. v. State Board of Equalization, the California Court of Appeals held that a manufacturer of telecommunications equipment was entitled to a refund on the tax the Board of Equalization (BOE) assessed on the licensing fees paid by its customers – who provided service to end users – for the software needed to operate the equipment. The court held that the contracts for the exchange of software were technology transfer agreements and, thus, intangible property exempt from tax. The manufacturer needed only to pay taxes on the equipment, instructions, and physical disks used to transmit the software. Lucent was awarded a $25 million refund from the BOE in addition to attorney’s fees. The California Supreme Court denied hearing an appeal of the decision.

Although Lucent was a case involving telecommunications equipment, the Court’s holding seemingly applies to any bundled transaction made by manufacturers that includes both their equipment and a licensing of their intangible intellectual property, creating an opportunity for savings.

The BOE has tried to go to the legislature before to mitigate court decisions and obtain expanded authority to levy taxes on software that is otherwise exempt. Given the expected $1.6 billion shortfall in Governor Brown’s budget, there may be an increased interest among legislators that see ending this exemption as a source of revenue. CMTA will be monitoring these developments. If you are a manufacturer that employs technology transfer agreements to facilitate partnering with other companies, we would be eager to hear how changes to the law may affect you. Please contact Jarrell Cook at JCook@cmta.net.

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