Nortel is Now Final: Most Software is Now Exempt from California Sales Tax; State Board of Equalization Expected To Fight Refund Claims

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Last week, the California Supreme Court denied the California State Board of Equalization's petition for review of the Court of Appeal decision in Nortel Networks, Inc. v. State Board of Equalization, holding that a license of prewritten software falls within California's sales and use tax exemption for transfers of intangible property pursuant to a technology transfer agreement (TTA).1

The Nortel case has broad implications for the taxation of prewritten software in California. The longstanding position of the State Board of Equalization ("SBE") has been that all sales of prewritten software are subject to the sales tax. However, the SBE must now review every software license on a case-by-case basis-even canned mass-market software-to determine whether the software is subject to a patent or copyright and, thus, covered by the TTA exemption. In the SBE's own words, under the Court of Appeal's ruling, which is now final, "sales of software programs, such as Windows 7 operating system, Microsoft Word, Quicken or TurboTax, will be subject to claims of exclusion from tax."2

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