8-County Suit Seeks Software Revenue

Governments routinely use computer software to streamline operations and save taxpayers money. Now eight California counties want to use certain kinds of software as a means of generating tax revenue.

Los Angeles, Orange and six other counties filed a lawsuit in state court, seeking to collect personal property taxes on important software on computers that IBM Corp. and other companies lease to businesses.

The value of the data-storage software is about $30 billion in Los Angeles County alone and roughly $100 billion statewide. That could mean $1 million in annual tax revenue for the eight counties.

But so far IBM has resisted paying tax on the software, which the company considers to be intellectual property and therefore “not taxable under personal property statutes,” said Fred McNeese, an IBM spokesman in Armonk, N.Y.

Companies that own at least $30,000 in business equipment--including desks, chairs and computers--are subject to a 1% personal property tax on the value of that equipment, according to Albert Ramseyer, deputy county counsel for Los Angeles County. In determining the value of a computer, assessors included the cost of the hardware and the software required to run it, such as an operating system. The counties contend that data storage is a function of the operating system.

“We’re talking about the basic operational program, which is fundamental and necessary to the functioning of a computer,” said Richard Kennedy, a project manager in the Orange County assessor’s office. “If you take it out, the computer wouldn’t run.”

IBM and other companies that own large fleets of computers that are leased to other businesses tried to reduce their tax burden by asking the State Board of Equalization to change the definition of “fundamental and necessary” software so operating systems were not included. The board amended its property tax rules with that exemption, which took effect Nov. 3.

So the eight counties--which also include Alameda, Napa, San Diego, San Francisco, Santa Clara and Solano--filed suit in Los Angeles on Friday against the board, claiming the new rules are invalid and should be abolished.

In the suit, the counties contend that the new rules are contrary to the “language and intent” of the original tax law passed by the Legislature, that they “create an unlawful exemption from property taxation,” and that in changing the rules, the board acted “beyond its lawful authority.”

Richard Johnson, chief of the Board of Equalization’s assessment standard’s division in Sacramento, said the tax law was clarified, not changed. He would not comment on the suit.