[Date]
Via Email
Randy Ferris, Esq.
Chief Counsel
California State Board of Equalization
450 N Street
Sacramento, California 95814
Re:
Initial Discussion Paper on Regulation 1507 Dated June 29, 2012,
Technology Transfer Agreements
Dear Mr. Ferris:
This letter is a follow up of our letter dated August 10, 2012, wherein we proposed a
compromise with regard to proposals for regulations interpreting the Technology Transfer
Agreement (TTA) provisions of the California statutes as they apply to sales of intangible
prewritten computer software sold together with tangible personal property. By this letter, we
make revisions to our proposal. Top reiterate the disclaimer set forth in our previous letter, the
proposals contained herein are SoFTEC’s alone and are not to be ascribed or attributed to any
other association.
Our member companies would support an amendment to Regulations 1502 and/or 1507
containing the following elements:



Sales of prewritten computer software on tangible storage media, such as disks or CDROMs, regardless whether sold by the developer of the software or a third-party retailer,
where the end user license agreement allows the purchaser to make no more than 5 copies
of the software, would not be treated as a TTA and would be subject to sales and use tax
at 100% of the sales price.
All other sales of a single copy of prewritten computer software on tangible storage
media, such as disks or CD-ROMs, regardless whether sold by the developer of the
software or a third-party retailer, would be treated as TTAs with the result the tangible
storage media would be treated as insignificant or irrelevant and not subject to sales or
use tax, a similar to the way so-called “gold masters” are treated under the second
sentence of Regulation 1502(f)(1)(B).
The TTA statutes would apply to prewritten computer software sold together with other
tangible personal property that is not a mere storage medium (such as a disk or CDROM). If the fair market value of the prewritten computer software is 20% or less of the
total selling price, there would be a rebuttable presumption that the entire selling price is
subject to sale or use tax. Software “embedded at the time of manufacture” of the

tangible personal property, even if separately stated on the sales invoice, would not be a
TTA. Additionally, if the fair market value of the software is more than 20% of the total
selling price, there would be a rebuttable presumption that 20% of the selling price would
be for the software and not subject to tax. Taxpayers would be able to rebut the
presumption with evidence that a different amount is attributable to the non-taxable
software component of the sales price.
The state would honor claims for refunds of sales tax from sellers and use tax from
purchasers consistent with the above formulae.
We will not restate the remainder of the discussion from our previous letter but incorporate it
herein by reference.
The premise of our approach is to divide sales of software sold on disk into two categories
that roughly distinguishes between sales to consumers, which would not be treated as TTAs, and
sales to businesses, which would be treated as TTAs. Generally, consumer software end user
license agreements (EULAs) allow the purchaser to load the software onto a single computer.
Some consumer EULAs allow the purchaser to make a handful of copes so the software can be
loaded onto the multiple computers the purchaser might own, such as a desk-top, a laptop or a
handheld computer. Generally, business-use software allows the making of sufficient copies for
use in the purchaser’s business. We believe EULAs allowing the making of more than an
insignificant number of copies are similar to the “gold master” provisions of Regulation
1502(F)(1)(B). Whether the copies are to be resold (as in Regulation 1502) or used by the
purchaser, should not make any difference to the taxability. Indeed, we can find no provision in
the California statutes that hinges the taxability of sales of prewritten computer software on such
a distinction. We recognize our proposal will result in some sales of software to businesses
where the license only allows the making of those copies necessary to the use of the software,
such as the switch specific software at issue in Nortel, as other than TTAs.
With regard to our proposed treatment of so-called ‘embedded software,” we have added a
suggested a safe harbor for cases where the value of the software compared to the other tangible
personal property is substantial. Sales tax issues frequently lead to tension between sellers and
buyers because the sale tax issue could depend on the disclosure by the seller of confidential
business information. The safe harbor would reduce this tension. Taxpayers should be allowed
to rebut the presumption with information showing the value of the software is greater than 20%.
Allowing taxpayers to treat a fixed portion of the sales price as attributable to non-taxable
intangible property would reduce disputes between sellers and purchasers and between taxpayers
and tax administrators.
Conclusion:
We ask that you give our amended proposal for compromise serious consideration. Please
feel free to contact the undersigned at (202) 486-3725 or mnebergall@softwarefinance.org with
any questions.
Respectfully submitted,
Mark E. Nebergall
President
Software Finance & Tax Executives Council