Microsoft Corp. v. Franchise Tax Board

In this action, plaintiff Microsoft Corporation seeks a refund of California state corporate franchise taxes paid for the tax years of 1995 and 1996. The taxes were based on income received in connection with the licensing of plaintiff’s software and sales of its keyboard and mouse. Plaintiff claims the royalties it received from computer manufacturers for the licensing of the right to replicate and install its software arise from an intangible property right, and therefore should not have been considered in calculating its tax liability. After a court trial, judgment was entered in favor of defendant, the Franchise Tax Board. The court concluded all the royalties at issue were taxable because they constituted receipts from the licensing of computer software products, which the court found to be tangible personal property. We reverse and remand the matter to the trial court for determination of the amount of tax owed by plaintiff based solely on income derived from the sales of its keyboard and mouse during the taxable years at issue.

FACTUAL BACKGROUND AND PROCEDURAL HISTORY

The parties have stipulated to the following facts. Plaintiff is a corporation organized and…