Software Sales Tax California Exemption

AGILE CONSULTING GROUP

February 14, 2022

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In 1993, the California legislature enacted a California software sales tax exemption for technology transfer agreements (“TTA”) relating to the transfer of intellectual property, but has never really honored that exemption until the 2011 Nortel court ruling. Now in 2017, California says it is nearly ready to begin issuing refund checks.

According to CA Code Regs. 1507 , a technology transfer agreement is defined as, “an agreement evidenced by a writing (e.g., invoice, purchase order, contract, etc.) that assigns or licenses a copyright interest in tangible personal property for the purpose of reproducing and selling other property subject to the copyright interest.” A technology transfer agreement also includes, “a written agreement that assigns or licenses a patent interest for the right to manufacture and sell property subject to the patent interest, or a written agreement that assigns or licenses the right to use a process subject to a patent interest.”

Software Sales Tax California Exemption: Defining Terms

Since a TTA only applies in situations where the tangible personal property is assigned or licensed subject to a copyright or patent interest, it is important to clarify the meaning of these terms under CA Code Regs. 1507 . A copyright interest means that the owner of the property has the exclusive right to authorize reproduction, distribution, and performance of the work subject to the copyright. Copyrights generally refer to “original works of authorship,” such as literary, musical, and dramatic works. A patent interest means that the owner of the patent has the exclusive right to, “make, use, offer to sell, or sell a patented process, machine, manufacture, composition of matter, or material.” Patents apply more to processes that have acts or steps that produce a “concrete, tangible and useful result.” Assigning or licensing a copyright or patent means, “to transfer in writing a patent or copyright interest to a person who is not the original holder of the patent or copyright interest where, absent the assignment or license, the assignee or licensee would be prohibited from making any use of the copyright or patent provided in the technology transfer agreement.”

Exemption Details

The exemption for a copyright or patent interest assigned or licensed by the owner in a technology transfer agreement only applies to the intangible portions of the transaction. For example, in a transaction that includes equipment, hardware, written instructions, a copy of computer software that makes the equipment and hardware work, and the right to copy that software onto the equipment’s hard drive to use the software to operate the equipment, the equipment, hardware, and written instructions are all considered tangible personal property and are subject to tax.

People typing on laptops at a desk with code on multiple screens

While the California Board of Equalization has attempted to argue that the copy of the computer software is also tangible personal property, the CA Court of Appeals ruled in the 2011 case   Nortel Networks Inc. v. State Board of Equalization   that the medium in which the copyright or patent is transferred is not essential or physically useful to the later use of this intangible property. Even if the property is transferred on a tangible medium, as long as it is assigned or licensed and subject to a copyright or patent, then it qualifies as a TTA.


Receiving the California software sales tax exemption is still a challenge for California taxpayers. Generally, vendors making sales of these types of items are still charging tax to their customers. There are no specific exemption certificates that customers can distribute to their vendors for purchases that qualify as technology transfer agreements. However, if sales tax has already been paid, collected, and remitted on the purchase of property that qualifies as a TTA in California, the purchaser can request their vendor to issue a refund or credit.

Navigate California Sales and Use Tax with Agile Consulting Group

As with all Sales & Use Tax research, the specifics of each case need to be considered when determining taxability. Agile Consulting Group’s sales tax consultants can be found on our page summarizing California sales and use tax exemptions. If you have questions, comments or would like to discuss the specific circumstances you are encountering in regard to this issue or any other Sales & Use Tax issue, please contact us at (888) 350-4TAX (4829) or via email at info@salesandusetax.com.

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