(This article originally was published in Vol. 25, No. 4 of the California Lawyers Association’s California Tax Lawyer.)
Section 995 and 995.2 of the California Revenue & Taxation Code exempt all software except for basic operational programs from property taxation. Basic input output systems, known as BIOS, draw the line between the taxable and nontaxable. BIOS, which by definition is necessary to the operation of the computer, handles primitive functions such as turning the computer on and off. BIOS is taxable. Everything else, such as operating systems like Windows, is not taxable. (Property Tax Rule 152; Cardinal health 301 Inc. v. County of Orange (2008) 167 Cal.Appl.4th 219.) Often, computers or other electronic devices are sold with nontaxable software (i.e., non-basic operating systems or application software) preloaded onto the device. When there is no separate sales price for the nontaxable software, it is termed “bundled” or “embedded” software. Embedded software is not taxable. Id.
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