California – Lucent Case Decided Technology Transfer Agreements Are Exempt (Again) – Protective Refund Claims Should Be Filed By October 31, 2015

SALT Report 3736 –On October 8, 2015 the California court of appeals decided (again) on the subject of Technology Transfer Agreement’s (TTA’s). As with the Nortel case (decided January 18, 2011, petition for review denied by the CA Supreme Court April 27, 2011) the BOE’s arguments were rejected (again). It is interesting to note that the court of appeals had 90 days to respond to the oral arguments presented on September 29, 2015. It took them 2 weeks to render the decision. Not only did they respond quickly but the opinion awards litigation costs of $2,625,469.87 to Lucent. Some quotes from the case.

On the subject of “absurd results”:

Second, the Board’s construction of section 6016 leads to an absurd result. Although we must evaluate the taxability of a transaction by what the taxpayer actually did rather than by what it could have done (Wallace Berrie & Co. v. State Board of Equalization (1985) 40 Cal. 3d 60, 70), in construing a statute we are to avoid an interpretation that leads to absurd results (Riverside County Sheriff’s Dept. v. Stiglitz (2014) 60 Cal. 4th 624, 630). If we accepted the Board’s construction of section 6016, AT&T/Lucent would be liable for $25 million in sales tax because it decided to transmit its software to the telephone companies using tapes and discs, but would have been liable for no sales tax on the software if had instead transmitted the software electronically (via email or through uploading it to a remote server on the internet for later download by the telephone companies)(Cal. Code Regs., tit. 18, § 1502,subd. (f)(1)(D) [sale of canned computer program not subject to sales tax if “transferred by remote telecommunications from the seller’s place of business”]). Ascribing such tremendous consequences to the manner in which a software program is transmitted – when that manner is wholly collateral to the subsequent use of the licenses regarding that software and when that manner is so easily manipulated by the buyer and seller-is an absurd result nowhere sanctioned by the language of, or policy underlying, California’s sales tax law.

On the subject of “legislative history” and “the Board’s objections” to TTA statutes:

Second, the Board asserts that the technology transfer agreement statutes codified the decision in Petition of Intel Corporation (June 4, 1992) [1993-1995 Transfer Binder] Cal. Tax Rptr. (CCH) paragraph 402-675, page 27,873 (Intel). Because Intel involved a transfer of intellectual property rights in anticipation of a mass production of software, the Board reasons, the statutes should be similarly limited. Although the technology transfer agreement statutes surely sought to codify Intel (Preston, supra, 25 Cal.4th at p. 216), the statutes the Legislature enacted reflect Intel’s central holding—namely, that only the tangible portion of a concurrent transfer of tangible personal property and intangible copyright and patent rights is subject to the sales tax—but the statutes are not limited to Intel’s factual context. Indeed, the statutes’ legislative history indicates that the Board warned the Legislature of how broadly the statutes could be construed, and the Legislature enacted the statutes anyway. (Nortel, supra, 191 Cal.App.4th at p. 1269 [“The Legislature enacted the [technology transfer agreement] statutes over the Board’s objections”].)

It seems to me the legislature knew what they were doing when the TTA statutes were codified on October 8, 1993. It seems to me the California Court of Appeal knew what they were doing when they decided Nortel on January 18, 2011.  It seems to me the California Supreme Court knew what they were doing when they rejected the BOE’s petition for review of Nortel on April 27, 2011. It seems to me the California Court of Appeals knew what they were doing when they decided Lucent on October 8, 2015.

The BOE has the ability to petition the California Supreme Court for review but what is the likelihood that the California Supreme Court will accept review of a case so redundantly similar, if not exact, to the Nortel case. Only time will tell. But time is running out to file a protective claim for refund.

Recommendation – Consult your California sales and use tax professional for an evaluation of the impact of this pending decision on your business.

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