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How Will Changes to California's 'Tech Transfer' Statute Impact Businesses?

The California State Assembly Committee on Revenue and Taxation held a meeting Monday, during which the public was given insight on the evolving relationship between state taxation and the digital economy.

The evolving relationship between state taxation and the digital economy was the topic of a California State Assembly Committee on Revenue and Taxation hearing Monday.

Discussion at the meeting centered around a Technology Transfer Agreement (TTA) statute, a type of arrangement involving a sale of tangible and intangible personal property. While the requirements of a TTA may seem fairly straightforward, a case settled last year between the state and Lucent Technologies Inc. has spurred recent conversation among lawmakers regarding the Court of Appeals' interpretation of the agreement’s statutes and its far-reaching revenue implications for the state of California.

According to the state Legislative Analyst’s Office, in order to qualify as a TTA, the seller must hold a patent or copyright interest and license the right to make or sell a product to the buyer, subject to the patent or copyright held by the seller. Under a TTA, Sales and Use Tax is applicable to tangible property and not to intangible property.

In the case with Lucent, the Court of Appeals claimed the Board of Equalization (BOE) had improperly assessed sales tax on the manufacturer when it asserted that copies of Lucent’s telecommunications software made on magnetic tapes and CDs transferred to nine different telephone companies qualified as tangible property. As a result, the court ordered the BOE to pay Lucent a sales tax refund of more than $24.5 million.

Although the dispute involving the BOE and Lucent was settled, questions still remain regarding the definition of “tangible” versus “intangible” in transactions where software is involved.

“The court’s view is because these were magnetic tapes, after the telephone companies purchased the tapes from the manufacturer, they can throw the tapes away because now it’s loaded onto the digital switches,” said Robert Lambert, assistant chief counsel of the BOE’s Litigation Division at the meeting. “Therefore it’s merely a convenient medium of transfer that is not needed to implement the intellectual property rights after the date of sale.”

While the BOE has not adopted a formal position, it has begun an interested parties process to update TTA regulations in accordance with the court’s interpretation of the TTA statute, the outcome of which will dictate tax refunds owed for prior transactions, as well as future sales. But as the state faces a deficit of almost $2 billion, the steps being made by the BOE to possibly alter TTA rules begs the question: How could this impact state funds?

“Any further deterioration of revenue due to an expansion of the current understanding of Technology Transfer Statutes and what transactions those statutes apply to will result in additional deficits and necessitate budgetary decisions to reduce programmatic spending or to otherwise increase tax revenue,” said Jay Chamberlain, chief of the Department of Finance’s Revenue and Taxation Section and a panelist at the meeting.

As with any new law or new interpretation of a law, there is always uncertainty regarding what the cost will be to the state. Chamberlain noted it is especially unclear exactly where the court decision involving extending the TTA statute will lead California and could potentially result in a revenue loss of billions of dollars. 

Maggie Cabrey is a staff writer for Techwire.