Journal of Multistate Taxation and Incentives (Thomson Reuters/Tax & Accounting) Volume 26, Number 9, January 2017 SALES AND USE TAXES Nortel, Lucent, and Taxing Embedded Software in California Under a Technology Transfer Agreement The significant open substantive question going forward is the position the Board of Equalization will adopt in light of Nortel and Lucent on the embedded software issue. By ERIC J. COFFILL, ROBERT P. MERTEN III and NICHOLAS J. KUMP ERIC J. COFFILL is Senior Counsel in the Sacramento Office of Sutherland Asbill & Brennan LLP. He can be contacted at
[email protected] or 916.241.0508. ROBERT P. MERTEN III is an associate in the same office and can be contacted at 916.241.0512 or
[email protected]. NICHOLAS J. KUMP is also an associate in that office and can be contacted at 916.241.0516 or
[email protected]. As consumer products become more high tech, the line between computers and traditional devices has blurred. Even basic products, such as toothbrushes, alarm clocks, doorbells, smartphones, cameras, home security systems, printers and copiers now include technical software that enables new functionality options for the device. As a general principle, tangible personal property, but not intangibles or services, is subject to California Sales and Use Tax.1 Software "embedded" into a product has value distinct from the value of the rest of the device and that distinct (intangible) value is not subject to sales tax. On the heels of two recent taxpayer victories in the California Court of Appeal relating to taxation of software, this article discusses current developments on how to treat such embedded software for California sales (and use) tax purposes.