California – Lucent/Nortel TTA “Case Closed” BOE Petition To California Supreme Court Rejected On January 20, 2016

SALT Report 3767 – April 27, 2011 and January 20, 2016 mark the dates that the California Supreme Court denied the two petitions for review in Nortel and Lucent. These cases and the TTA issues are now closed, the decision is final. Now what? It all started in 2001 when Nortel protested (and paid) an 8 figure assessment ($32,054,936.62) asserted by the California State Board of Equalization. Lucent found themselves in a similar (if not exact) situation to the tune of $18,641,474.02 ($6,319,583.44 Lucent I and $12,321,890.58 Lucent II). The contentions were related to Technology Transfer Agreements and amount to over $50 million in sales and use tax between the two companies (Nortel and Lucent). This 15 year odyssey from beginning to “case closed” has revealed disconnections and deficiencies, delving deep into the details of regulatory authority bestowed upon the Board of Equalization.

In summary, the BOE, Lucent and Nortel contentions revolved around the interpretation of law Sections 6010.9, 6011 and 6012 and California Sales and Use Tax Regulations 1502 and 1507. These sections set forth and interpret the specific exemption for intellectual property transferred in what is known as a Technology Transfer Agreement. What exactly is a TTA? According to law Section 6011(c)(10)(D) a TTA is this:

(D) For purposes of this paragraph, “technology transfer agreement” means any agreement under which a person who holds a patent or copyright interest assigns or licenses to another person the right to make and sell a product or to use a process that is subject to the patent or copyright interest.

Claims for refund have been held in abeyance and are now being considered for resolution. Currently the state of California is turning to Sacramento for guidance on how to deal with the number of protective claims filed. The California Settlement section is also encouraged to resolve outstanding refund requests. The scope and impact of these cases on the California marketplace have yet to be quantified. Business decisions on the part of effected taxpayers should be evaluated in the cost/benefit balance in order to determine whether some quick accommodation through settlement (i.e., 38% refund) versus a long drawn out resolution (i.e. 95% refund) makes more sense.

If your organization has not filed a protective refund claim for qualifying TTA’s it may make sense to evaluate your purchases (i.e., software, automated machines, IP…so on) and determine the scope of any potential recovery of overpaid sales or use tax. For California sales and use tax purposes the next expiring statute of limitation is likely going to be April 30, 2016. A refund claim filed by April 30, 2016 will hold the statute open back through January 1, 2013 making all overpayments available for refund for that time period.

It’s been a long drawn out process these last 15 years but at this point Nortel, Lucent, advisors/legal team and the state of California can rest their cases and move on to resolution.

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