The Senate approved a patent reform bill on Thursday containing provisions that eliminate patents on tax strategies.

Max Baucus

The bill passed by an 89-9 margin. It echoes a similar bill passed in June by the House and will go to President Obama’s desk for his signature. Legislators defeated an amendment by Sen. Tom Coburn, R-Okla., that would have prevented patent fees from being diverted to other uses than for the patent office by a vote of 50-48, along with other several other amendments that would have sent the bill back to the House. The Senate had passed an earlier version of the patent reform bill in March.

The ban on tax strategy patents has been pushed by the American Institute of CPAs. It has also been championed by Senate Finance Committee Chairman Max Baucus, D-Mont., and senior committee member Chuck Grassley, R-Iowa. The two lawmakers hailed the Senate’s passage of their bill to protect taxpayers and fight tax evasion, which was included in the larger patent reform bill. 

The Baucus-Grassley legislation prevents any individual or firm from patenting tax strategies, which could otherwise subject taxpayers to royalty fees for using the patented strategy when filing their taxes. The bill also stops tax patents from providing windfalls to lawyers and patent holders by preventing them from holding exclusive rights to use loopholes, which could provide some businesses with unfair advantages over their competitors.  Now that both the House and Senate have passed the patent reform bill, it goes to the President for his signature.

“Unfair patents can give a small number of people a stranglehold on tax strategies that should be open to anyone,” Baucus said in a statement. “This bill will bring fairness to the system, and it will deter the use of tax shelters to evade the responsibility we all share. Our ongoing tax reform effort will continue cleaning up the code, and it can create jobs and be a major boost to our economy.”

In order to obtain a patent, an inventor must show, among other things, that the claimed invention is novel and non-obvious and has a practical application. In 1998, the courts determined that a method of doing business may be patentable, and soon thereafter, the U.S. Patent and Trademark Office began granting patents for various tax-related inventions.

Patents on tax strategies are unlikely to be novel, the senators noted, given the public nature of the Tax Code, and undermine the fairness of the Federal tax system by removing from the public domain particular ways of satisfying a taxpayer’s legal obligations.  The bill expressly provides that a strategy for reducing, avoiding or deferring tax liability cannot be considered a new or non-obvious idea, and therefore, a patent on a tax strategy cannot be obtained.

“Tax strategy patents are on the rise.  More and more legal tax strategies are unavailable or more expensive for more and more taxpayers,” Grassley said. “It’s important to protect intellectual property rights for true tax preparation and financial management software. At the same time, we have to protect the right of taxpayers to have equal access to legal tax strategies. That’s necessary for fairness and tax compliance. We need more tax compliance, not less.”

AICPA president and CEO Barry Melancon praised the passage of the bill. “The Senate’s overwhelming passage today of H.R. 1249, the America Invents Act, will stop the issuance of tax strategy patents and help protect taxpayers from lawsuits, royalties, and increasingly complicated tax compliance requirements," he said in a statement "The bill will also help to ensure that our tax code is fair and accessible to all. No one should have a monopoly on a particular form of tax compliance. The AICPA has advocated for legislation to solve the tax strategy patent problem for more than five years, along with state CPA societies, and a national coalition of taxpayer rights groups, consumer and public interest groups, financial planners and other tax preparer groups. We especially appreciate the leadership of Congressmen Bob Goodlatte and Lamar Smith and Senators Patrick Leahy, Charles Grassley, and Max Baucus - who were all steadfast champions of this important pro-taxpayer provision. We urge President Obama to quickly sign the America Invents Act into law.”