Cardinal Health 301, Inc. v. County of Orange

I. INTRODUCTION

The instant case presents a textbook example of how easy it is to confuse the difference between “necessary” and “sufficient” conditions. In California, all computer software subject to property tax is “bundled” (i.e., comes preinstalled on the computer when you buy it). But not all “bundled” computer software is subject to property taxation. Certain kinds of software are not subject to property taxation even if they do come “bundled” with the computer hardware.

More specifically, the Legislature has clearly stated, in sections 995 and 995.2 of the Revenue and Taxation Code, that “application” software, as distinct from “basic operational” software, is not to be valued for purposes of property taxation. And the State Board of Equalization has clearly provided, in section 152 of title 18 of the California Code of Regulations—often referred to as “Rule 152” —that taxpayers may demonstrate that a portion of the value of a computer represents nontaxable application software despite the fact that application software came “bundled” inside the computer when the customer bought or leased it.

That is, bundling is a necessary condition for taxation, but not a…