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Lucent Technologies, Inc. v. Board of Equalization

Court of Appeal of California, Second Appellate District, Division Two

October 8, 2015, Opinion Filed



 [**326]  HOFFSTADT, J.—A manufacturer sells sophisticated telecommunications equipment to nine different telephone companies, who in turn use that equipment to provide telephone and Internet services to their customers. In the transactions between the manufacturer and telephone companies, the companies paid for (1) the equipment, (2) written instructions on how to use the equipment, (3) a copy of the computer software that makes the equipment work, and (4) the right to copy that software onto the equipment's hard drive and thereafter to use the software to operate the equipment. In Nortel Networks Inc. v. Board of Equalization (2011) 191 Cal.App.4th 1259 [119 Cal. Rptr. 3d 905] (Nortel [***2] ), we held that an almost identical transaction satisfied the requirements of California's technology transfer agreement statutes (Rev. & Tax. Code, §§ 6011, subd. (c)(10), 6012, subd. (c)(10))1 and, as such, the manufacturer was responsible for paying sales taxes only on the tangible portions of the transaction (the equipment and instructions), but not the intangible portions (the software and rights to copy and use it). Notwithstanding Nortel, the Board of Equalization (Board) in this case persisted in [*26]  assessing a sales tax of nearly $25 million on the intangible portions of nearly identical transactions. The manufacturer paid the taxes, and filed this action seeking a refund.

The Board's assessment of the sales tax was erroneous. In so concluding, we hold that (1) the manufacturer's decision to give the telephone companies copies of the software on magnetic tapes and compact discs (rather than over the Internet) does not turn the software itself or the rights to use it into “tangible personal property” subject to the sales tax, (2) a “‘technology transfer agreement’” within the meaning of sections 6011, subdivision (c)(10)(D) and 6012, subdivision (c)(10)(D), which exempts from the  [**327]  sales tax the intangible [***3]  portions of a transaction involving both tangible and intangible property, can exist when the only intangible right transferred is the right to copy software onto tangible equipment, and (3) a technology transfer agreement can exist as long as the grantee of copyright or patent rights under the agreement thereafter copies or incorporates a copy of the copyrighted work into its product or uses the patented process, and any of these acts is enough to render the resulting product or process “subject to” the copyright or patent interest.

Moreover, because the Board's trenchant opposition to the manufacturer's refund action in this case was all but foreclosed by Nortel and other binding decisional and statutory law, the Board's position was not “substantially justified” and the trial court did not abuse its discretion in awarding the manufacturer its “reasonable litigation costs.”

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241 Cal. App. 4th 19 *; 193 Cal. Rptr. 3d 323 **; 2015 Cal. App. LEXIS 886 ***

LUCENT TECHNOLOGIES, INC., et al., Plaintiffs, Cross-defendants and Respondents, v. BOARD OF EQUALIZATION, Defendant, Cross-complainant and Appellant.

Subsequent History: Modified and rehearing denied by Lucent Technologies, Inc. v. Board of Equalization, 2015 Cal. App. LEXIS 986 (Cal. App. 2d Dist., Nov. 3, 2015)

Time for Granting or Denying Review Extended Lucent Techs. v. State Bd. of Equalization, 2016 Cal. LEXIS 2636 (Cal., Jan. 11, 2016)

Review denied by Lucent Technologies, Inc. v. State Board of Equalization, 2016 Cal. LEXIS 483 (Cal., Jan. 20, 2016)

Prior History:  [***1] APPEAL from a judgment of the Superior Court of Los Angeles County, Nos. BC402036 & BC448715, Steven J. Kleifield, Judge.

Disposition: Affirmed.


software, tangible personal property, technology transfer, license, sales tax, patent, switches, telephone company, subject to sales tax, transferred, tangible, tapes, media, intangible, rights, manufacturer, argues, contracts, refund, intangible personal property, computer software, taxpayer, reasons, transactions, substantial justification, inextricably intertwined, litigation costs, trial court, compact disc, customers

Tax Law, State & Local Taxes, Sales Taxes, Imposition of Tax, Sales Tax Definitions, Exempt Sales, Civil Procedure, Appeals, Summary Judgment Review, Standards of Review, Administration & Procedure, Judicial Review, Governments, Legislation, Interpretation, Courts, Judicial Precedent, Copyright Law, Scope of Copyright Protection, Assignments & Transfers, Divisibility of Rights, Administrative Law, Agency Rulemaking, Rule Application & Interpretation, Validity, Costs & Attorney Fees, Costs, General Overview, Standards of Review, Abuse of Discretion