- Definition and Tax Treatment: Under California’s Sales and Use Tax Law, a technology transfer agreement (TTA) is defined as a mixed transaction involving the sale of tangible personal property (TPP) and the assignment or licensing of intangible rights. Currently, only the reasonable value of the TPP is subject to sales tax, while the value of the intangible rights is excluded.
- CDTFA Proposals: The California Department of Tax and Fee Administration (CDTFA) is proposing amendments to clarify how taxpayers should allocate the value of tangible and intangible components in a TTA. They endorse a cost-build-up method, stating that the TPP’s value should include only direct labor and materials, and affirm that intangible rights can be transferred through supply chains with clear contractual terms.
- Pre-Certification Processes: CDTFA is introducing two pre-certification options for retailers: (1) the option to exclude up to 20% of the TTA’s overall value from tax (subject to audit), or (2) the ability to submit documentation for potential certification of a higher exclusion percentage. These processes will also allow authorized resellers to benefit from established exclusion percentages. Finalized amendments are expected in 2026.
Source EY
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