SC&H Group Blog: "Expertise Beyond the Numbers"

Summary of May 22nd BOE Meeting on Exempt Embedded Software Tax in CA

Last week on the SC&H Group blog, we highlighted the challenging issue of quantifying and proving the costs of non-taxable embedded software within high tech equipment for the purpose of property taxation, which has been debated in the state of California for years.

At their meeting on May 22nd, the California Board of Equalization (BOE) resumed discussions related to this issue. Several interested parties presented testimony to discuss both long and short-term solutions.

For example, the Chairperson for the California Assessor’s Association (CAA) Embedded Software Ad Hoc Committee said they are in the process of obtaining additional research related to this issue that they will share with the BOE later this year.  The CAA status report included the following:

  • The CAA hired a software engineer to conduct a study to determine if operational software can be split from application software in equipment containing embedded software, and this independent study will not be influenced by assessors or industry representatives.  The final study is expected later this year and will be shared with the BOE as well as published in engineering and other professional journals.
  • The CAA is also in contract negotiations to hire a professor qualified in this area to develop a white paper on embedded software with an expected completion by the October BOE meeting.
  • As a short-term solution to promote uniformity for the assessment of embedded software, the CAA adopted a “guide” to assist county assessors with the issue, which they stated is a “living” document to allow for potential changes and updates from all parties involved.

The California Taxpayers Association (CALTAX) said they would review the guide adopted by the CAA and provide input.  CALTAX thanked the BOE Property Tax Committee staff for expanding the study of how other states handle this issue, to which CALTAX concluded the study identified three main commonalities:

  • Embedded software can be split from the “bias,” which is how these other state and local jurisdictions are able to quantify it.
  • Other state and local assessors use a multitude of evidence sources versus only requesting invoice support to quantify embedded software.
  • Assessors are willingly and successfully working with taxpayers to quantify the embedded software.

The BOE expressed they are aware there is a collective desire to come to an agreement on this issue but are limited due to an outdated statute.  Therefore, the BOE agrees with CAA and CALTAX that a legislative change is the probable solution, and they are willing to share information to assist the legislature with that process.

The BOE would like to continue to monitor the CAA’s research projects by reconvening discussions at their August and October meetings and asked all parties, including industry representatives, to continue collaboration on this topic.  The BOE Property Tax Staff was also encouraged by the Board to contact the taxpayers who have communicated a willingness to share information and data in an effort to identify and document the specific challenges in quantifying embedded software costs to further assist with the legislative process.

SC&H Group will continue to monitor this complicated issue and update you on this topic.  Stay tuned to the SC&H Group blog for more information as it happens.

To learn more about SC&H Group’s State & Local Tax practice, click here.


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