Tax Patents: What are they? They’re patented tax strategies, typically held by business entities. These processes were briefly patentable inventions and not just a niche intellectual property. Their primary aim was to minimize tax obligations. Tax strategies were also distinct from any sort of tax preparation software, tool, or system.
A mark, perhaps, of American cooperative political and corporate maneuvering in the early 2000s, the legal acceptance and validation of patented tax strategies was immediately controversial. Did tax patents have a negative impact on social welfare, incentivize reducing tax liability, lead to distorted tax obligations, and complicate legal compliance for everyone? Or, were they a positive development in the vein of other patentable business strategies, and improved the public disclosure of tax shelters? All of these arguments, and more, were put forth in a CRS Report for Congress by John R. Thomas in “Patents on Tax Strategies: Issues in intellectual property and innovation”, which I highly recommend reading if you’re interested in learning more, as I cannot hope to provide as sufficient an explanation in a blog post. It’s fairly brief at 20 pages, including citations, cover page, and table of contents.
The report was released in 2010, as several bills potentially affecting tax strategy patents were making their way into congress. Legislation enacted in 1999 led to the patentability of business methods, and tax strategies fell under that umbrella. It followed the State Street Bank & Trust Co. v. Signature Financial Group litigation, which started in 1998.
For an example of a tax strategy patent that made its way into courts, visit U.S. Patent 6,567,790.
Tax strategies saw the end of their days when the Leahy-Smith America Invents Act (AIA) (Public Law 112-29) was signed in 2011. Patent law was significantly changed by the AIA. One of the most often cited results was the change from granting patents to the person who first invented something (an almost exclusively American practice), to granting patents to the person first to file (more internationally common). This lifted the obligation to provide evidence of being the first to invent; I cannot imagine how nearly impossible that would have been to prove or decide.
Section 14 of the AIA specifically called out tax strategies. Read it all here. Starting on page 45 of the PDF, Section 14 broadly states that any strategy to avoid any tax liability is inherently insufficiently differentiable from any prior art, and therefore unpatentable. (The same section also makes allowances for tax preparation software, tools, and systems.) It applied to any patent filed or application pending on or after the date the AIA was enacted—so previously patented tax strategies could still claim that status until their expiration date.
Basically, Section 14 means that whatever you just did for your 2021 annual taxes, you can’t patent. Happy Tax Day!