Software Technology Transfer Agreements
- Is my agreement for the sale or purchase of software a technology transfer agreement (TTA)?
- If my agreement is a TTA, what is the amount subject to tax?
- Industry Study
- Business Taxes Committee
- Can I file a claim for refund?
- How should I handle software TTAs in the future?
- Staff Contact
If you hold patent or copyright interests in non-custom software and you make retail sales of the software on tangible media, then a portion of the proceeds from your retail sales of the software may be excluded from your gross receipts subject to sales tax.
If you purchase non-custom software on tangible media in a transaction that is subject to use tax from a retailer who holds patent or copyright interests in the software, then a portion of the price you paid for the software may be excluded from the sales price of the software that is subject to use tax.
In Nortel Networks, Inc. v. State Board of Equalization (2011) 191 Cal.App.4th 1259, the Court of Appeal determined that an agreement for the sale of non-custom software could qualify as a technology transfer agreement (TTA). As such, an agreement for the sale or purchase of non-custom software on tangible storage media may qualify as a TTA when the agreement for the sale or purchase also assigns or licenses the right to make and sell a product or the right to use a process that is subject to a patent or copyright interest. Because Revenue and Taxation Code sections 6011(c)(10) and 6012(c)(10) require that the retailer also hold the patent or copyright interests being assigned or licensed, most agreements for sales of off-the-shelf software will not qualify as technology transfer agreements, as explained in a BOE issued News Release on May 27, 2011, addressing the Nortel case.
In order to establish that an agreement qualifies as a TTA, the taxpayer must be able to document that the retailer of the non-custom software sold in tangible form held patent or copyright interests in the software, and transferred the patent or copyright interests to the purchaser of the software under the terms of the agreement. The retailer must be able to provide documentation from the United States Patent and Trademark Office documenting that the retailer obtained the patent, or, in the case of a copyright, the retailer must be able to provide a certificate from the U.S Copyright office or other reasonable and satisfactory documentation to establish original ownership or authorship of the copyrighted work. If the retailer obtained the patent or copyright interests from another party, the retailer must be able to provide written documentation to show that it held the patent or copyright interests at the time of sale. If you are the purchaser of the software seeking a refund, you will still be required to provide written documentation establishing that the retailer held the patent or copyright interests at the time of the sale.
In general, sales tax applies to a retailer's gross receipts from the sale of tangible personal property and use tax applies to the sales price of tangible personal property. When tangible personal property is transferred with patent or copyright interests under a TTA, the gross receipts from the sale of the tangible personal property or the sales price of the tangible personal property is:
- The separately stated reasonable price for the tangible personal property stated in the TTA; or
- If there is no separately stated reasonable price in the TTA, the separately stated reasonable price at which the tangible property or like tangible personal property was previously sold by this retailer or by a third party; or
- If there is no separately stated reasonable price available, 200 percent of the cost of the materials and labor used to produce the tangible personal property.
The cost of the materials and labor used to produce tangible personal property includes the software development costs of non-custom software imprinted on tangible media. We recognize that establishing the software development costs for each sale of software may be difficult.
Because of the difficulty in establishing the taxable portion of a TTA's lump-sum sales price for non-custom software and patent or copyright interests, the Board approved a cooperative study with industry to determine the feasibility of adopting an optional percentage that can be applied to a TTA's lump-sum sales price to estimate the amount paid for the tangible personal property transferred under the TTA if the 200 percent formula had been utilized. The informal issue paper requesting the study was presented at the August 23, 2011 Board meeting.
At the March 20, 2012, Board meeting, staff informed the Board that only one company had contacted staff to indicate an interest in participating in the study. Although the participant could provide valuable information, staff did not believe it would be appropriate to establish an industry standard based on one company’s data. As a result, the study has not proceeded thus far. However, if the Board adopts an optional percentage for determining the taxable portion of a TTA's lump-sum sales price for software and patent or copyright interests through a subsequent regulatory process, then that percentage will be available for use by taxpayers at that time.
At the March 20, 2012, Board meeting, the Board directed staff to begin an interested parties process to discuss whether it is necessary to amend Regulation 1507, Technology Transfer Agreements, to explain when an agreement involving the transfer of software on tangible storage media qualifies as a TTA and how tax applies to the sale of tangible personal property transferred in a software TTA. The BTC provides a forum for interested members of the public to express their views and present proposals regarding the provisions and policies related to the tax and fee laws administered by the Board of Equalization.
Staff issued a discussion paper on this issue on June 29, 2012, and held the first interested parties meeting to discuss the issue on July 17, 2012. Staff provided an update regarding the issue during the Board’s August 21, 2012, meeting. Staff distributed the second discussion paper on October 5, 2012, and held a second meeting with interested parties on October 11, 2012. Staff will distribute the Formal Issue Paper on January 4, 2013 and this issue is scheduled for discussion at the January 15, 2013 meeting of the BTC. For other important dates in the BTC process, please refer to the 2013 BTC calendar.If you would like to be included in the mailing list to receive future information on the TTA issue, please send an email request to email@example.com or to Robert.Wilke@boe.ca.gov and provide your name and email address.
California's sales tax generally applies to retailers' gross receipts from the sale of tangible personal property in the state. California's use tax applies to the storage, use, or other consumption in the state of tangible personal property purchased from a retailer. Generally, if sales tax applies when you buy tangible personal property in California, use tax applies when you purchase similar property from an out-of-state retailer for storage, use, or other consumption in California. The sales tax is imposed on the retailer/vendor and the use tax is imposed on the consumer. However, some out-of-state retailers collect use tax from their customers and report and remit it to the BOE. Additional information regarding the use tax is available on our California Use Tax Information page.
If you purchased non-custom software from a California retailer under a TTA and you paid sales tax reimbursement to your retailer, then you must contact your retailer to apply for a refund of any excess sales tax reimbursement that the retailer may have collected from you on the purchase of the software.
However, if you paid use tax, rather than sales tax, on your purchase and the non-custom software was transferred under a TTA, then you may file a claim for refund with the Board for any use tax you overpaid. You will be required to provide documentation that the transaction qualified as a TTA, including that the retailer held the patent and copyright interests at the time the software was purchased, and to support the amount you claim as a refund.
Directions for completing the form are available on our Claim for Refund form.
If you did not sell or receive any tangible personal property (for example, you downloaded the software electronically from the retailer's website), the sale or purchase is not subject to sales or use tax (and there is no TTA at issue).
If you sell non-custom software in tangible form and the software is transferred under a TTA, consider:
- Documenting that the sale of software qualifies as a TTA. There must be a written agreement and the retailer of the software must also be the holder of the patent or copyright interests transferred. Otherwise, the transaction does not qualify as a TTA and the entire sales price of the software is subject to tax.
- Setting a selling price for the tangible personal property portion of the transaction that is reasonable pursuant to the statutory provisions. By setting a reasonable selling price for the tangible personal property, you will not be required to use the 200 percent cost mark-up method provided in the statute.
Email Robert Wilke for more information, or call him at 916-445-2137.