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Software: a taxing problem

A group of California county assessors ask the State Board of Equalization to let them count operating systems as part of a company's taxable assets.

Fearing that a recent change in tax rules might cut them out of a significant revenue source, a group of California county assessors have asked the State Board of Equalization to let them count operating systems like DOS, Windows, OS/2, and Unix as part of a company's taxable assets.

In California, county assessors are able to levy taxes on what the Board of Equalization considers a computer's basic input-output system or BIOS. Until recently, many assessors have interpreted that rule to mean they could include the value of operating systems like Windows as part of a businesses' assets.

This practice was, needless to say, unpopular with many California businesses and on November 3, the Board issued a definition of a computer's BIOS that would prevent county assessors from levying taxes on operating systems for either desktop or mainframe computers.

Those assessors--led by Los Angeles County--struck back last week by filing a lawsuit in the Los Angeles Superior Court that would redefine the rules one more time--this time giving them a indisputable right to tax operating systems software. The half-dozen counties participating in the lawsuit include Santa Clara and Orange counties.

"The state board, in our opinion, defines basic operational software as application software," said James Rees, deputy county counsel for Santa Clara County. "We feel this amendment is contrary to the statue passed by the Legislature."

He added that counties will lose a "quite substantial" amount of revenue if the current definition is allowed to stand, although he said precise estimates are hard to determine.

The court is being asked to examine the board's definition of what makes a basic operating software-- the operating system software, which is installed on a computer's hard drive to control the system and its "look and feel," or the very basic software hard-coded into a computer's microprocessor that allows the software to be turned on and look for instructions from the operating system. Every computer must have both kinds of software to run, but the taxable value of the operating system software is much higher than the built-in basic coding. The assessors' concern that they will lose a good chunk of their tax base in the next tax year.

State officials say that county assessors are asking to be given back a right they never had in the first place.

"We're clarifying something that was considered exempt under the rules. Some people were being assessed for this software, when it was being assessed incorrectly," said Mark Buckley, supervising property appraiser for the State Board of Equalization. "For some counties, they won't be losing money or have to give refunds because they were assessing software properly all along."

IBM is also named as a defendant in the lawsuit because the company had contested taxes levied on software that it had leased to Orange County several years ago.

Other companies that believe they have paid inappropriate software taxes are able to request refund forms from the county clerk's office. But they can only file claims up to four years after the taxes were paid.