Appellate Court Holds Software Not Subject to California Sales Tax:
What is Eligible for Refund and How To Navigate the SBE To Secure It

The Reed Smith State Tax Group will present a teleseminar on the California Court of Appeal decision in Nortel Networks, Inc. v. State Board of Equalization, Thursday, February 3, 2011 at 2 p.m. (EST).

Please join members of Reed Smith's State Tax Group, including former State Board of Equalization Legal Counsel Marty Dakessian, former Franchise Tax Board Chief Counsel Brian Toman, and former MCI Tax VP Walt Nagel, as they discuss Nortel Networks' recent big win against the State Board of Equalization (the "Board" or "SBE") at the California Court of Appeal, the Board's likely reaction, and what taxpayers need to do to secure a refund.

Program Background

Two weeks ago, a California Court of Appeal held that software licensed by Nortel Networks Inc. (Nortel) to a telephone company is exempt from the California sales tax because such licenses qualified as Technology Transfer Agreements, which are statutorily exempt from the sales tax. The court also invalidated the Board's regulation, holding that by excluding pre-written software from the definition of "technology transfer agreement," it exceeded the scope of the underlying statute. Many taxpayers are now considering their options after this potentially groundbreaking decision.

This case may have broad implications for the application of the California sales/use tax to prewritten software, but many hurdles must be crossed before matching Nortel's success. The SBE's position is that all sales of prewritten software are subject to the sales tax. However, the Board must now look at software on a case-by-case basis and, if the software is subject to a copyright or patent, the software should not be taxed. Based on the Board's position on this topic, many companies have collected tax on all sales of prewritten computer software. Since most computer software is subject to copyright and/or patents, taxpayers who purchase prewritten computer software on such sales should consider having the seller file claims for refund on their behalf, or file the claims directly with the state themselves in the case of use tax. Our panel will also inform taxpayers of what lies ahead in terms of the legal battle, SBE staff's likely reaction, and implementation of the decision.

For additional information on Reed Smith's State Tax Group, please visit www.reedsmith.com/statetax.