The California Board of Equalization or BOE has lost another appeal, this time relating to the assesment of sales tax on the sale of software by Lucent Technologies. California law prohibits the taxation of software, but allows sales tax to be charged for any tangible media upon which it is transferred (such as a CD or magnetic tape, or embedded within physical technology such as a phone).
The Appellate Court noted a fomer decision from 2011 involving Nortel, in which the circumstances were alomst the same. The BOE had argued that the software could be seen in physical form microscopically, and therefore was a taxible transaction. The Court disagreed, and cited the 2011 Nortel case, as well as noting the legal issues raised by non-taxible transfers of software (such as over the internet) being any different than a physical media. The Court approved $2.6 million in attorneys fees for Lucent, after totally rejecting the BOE’s position as not “reasonably justified.”
This case does illustrate the extensive measures the BOE and other California agencies are willing to undertake in order to generate tax revenue. This is why it is important for any business or individual to stand up to California’s tax agencies and protect their legal interests. Cases involving California and the IRS such as attempts to re-classify independent contractors as employees during an audit are clear examples of the liabilities any California or US taxpayer assumes when facing a tax agency without the representation of seasoned tax attorneys.