Embedded Software

Computer software does not reside only in the desktop and laptop machines we use every day at home and in business. Increasingly, software is also embedded in all sorts of machinery and equipment. This latter form of software, which serves to control via computer chips processes that were once performed mechanically or manually, is called "embedded software."

In general, software is classified as nontaxable property. The one exception to this general rule is software that is considered a "basic operational program" or "control program." These terms refer to a computer program that is fundamental and necessary to the functioning of a computer.

All other software (sometimes called application software) is nontaxable. But if the application software comes bundled with the computer hardware or other equipment at a single price and the taxpayer does not provide the assessor with information that will enable the assessor to separately estimate its value, then the assessor may consider the total bundled price as indicative of the value of the taxable tangible property.

Since equipment vendors usually do not itemize the cost of the embedded software, and since taxpayers and assessors may lack the expertise to separately value the nontaxable software, the proper assessment treatment of equipment with embedded software has been problematic.

In recent years, the BOE has worked with assessors and taxpayer groups to move toward solutions to the problems involved with embedded software. All documents regarding this project are posted at www.boe.ca.gov/proptaxes/es.htm