California Tax Regulations for Technology Transfer Agreements May Change

 Posted on October 08, 2025 in Taxation Law

Due to rapid technological advancement, federal and state tax laws may take time to catch up with the ways people use technology and the ways computer hardware and software are sold or licensed. In recent years, there has been some confusion about how computer software is taxed in California, including the sales and use taxes that may apply to Technology Transfer Agreements. Some proposed changes to state tax regulations may help to clarify this issue.

As tax laws change, taxpayers will need to understand their legal requirements to ensure that taxes will be paid correctly. Small businesses or other companies involved in Technology Transfer Agreements can work with an experienced attorney to make sure all tax-related issues have been addressed while avoiding potential penalties.

Taxes on Technology Transfer Agreements

Transactions involving computer software may be classified as Technology Transfer Agreements (TTAs) in certain situations. In general, TTAs involve the sale or purchase of non-custom software that is stored on tangible media. Under California law, sales and use taxes typically only apply to tangible personal property (TPP). This means that when software is purchased or sold through a TTA, the physical media on which the software is stored may be taxable, but the software itself is not.

Because there has been confusion about what may or may not be taxable in a TTA, the California Department of Tax and Fee Administration (CDTFA) recently released some proposed new regulations that will address this issue. Under these regulations, the tax treatment of software will remain the same, but some additional clarification has been provided about how different types of software may be classified.

The new regulations make a distinction between bargained-for software and non-bargained-for software. Bargained-for software may include any software sold or licensed separately from hardware. For example, when purchasing a computer, word processing or accounting software may be included, and the price for this software may be listed as a separate item on an invoice. In these cases, it will be rebuttably presumed that the software in a TTA is bargained-for software that is excluded from sales and use taxes.

Non-bargained-for software generally includes pre-written software that a purchaser did not agree to purchase separately from hardware. For example, an electronic device such as a digital clock may include software that allows the device to operate, and this software is not optional. Non-bargained-for software will typically be included in the purchase price of a device, and it will not be excluded from sales and use taxes in a TTA.

Other factors that may affect the taxability of TTAs include whether the seller owns the patents or copyrights to the software and the method of transferring the software. While sales and use taxes may apply in cases where software is stored on tangible personal property, transactions in which software is purchased and transferred digitally may not be taxable. Any applicable sales and use taxes will be based on the value of the TPP, which may be the separately stated reasonable price of the hardware, or, if no separately stated price is available, 200% of the costs of materials and labor used to produce the hardware.

Contact Our San Jose, CA Tax Attorney

While the proposed new regulations will not substantially change the ways taxes are assessed on purchases or sales of computer software, they may provide some clarity on when sales and use taxes may apply. At John D. Teter Law Offices, our San Jose tax lawyer can provide guidance to small businesses or other companies that sell or purchase software, ensuring that the proper state taxes are paid. To learn more about how we can help address concerns related to state or federal taxes, contact us at 408-866-1810 and arrange a consultation.