Opinion ID: 895322
Heading Depth: 2
Heading Rank: 3

Heading: Sourcing Receipts from Intangible Assets

Text: The history of the franchise tax indicates that the Comptroller has been allocating receipts from intangibles to the state of the payor's domicile since 1917. Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172, 180 (Tex.1967). This practice ended in 1959, in part, when the Legislature amended the sourcing statute to require use-based sourcing for two kinds of intangibles, patents and copyrights. See Act of August 6, 1959, 56th Leg., 3rd C.S., ch. 1, art. 12.02, 1959 Tex. Gen. Laws 187, 307 (sourcing royalties from the use of patents or copyrights to their place of use). Before this, the sourcing statute consisted of a single catch-all provision, for business done in the state, similar to subsection (6) of the current statute. [5] And under the earlier statute, the Comptroller sourced all receipts from intangibles under the location of the payor rule. See Humble Oil & Refining Co., 414 S.W.2d at 180. After the 1959 amendment, receipts from intangible assets, other than patents and copyrights, continued to be taxed as other business under the location of the payor rule until 1988, at which time the Comptroller began sourcing revenue from three additional intangible assets based on location of use. The Comptroller made this change by promulgating a new rule. Rule 3.403(e)(11) provided that [r]eceipts to the owner for the use of trademarks, franchises, and licenses are allocated according to the location where used. 12 Tex. Reg. 2971 (1988) (to be codified at 34 Tex. Admin Code § 3.549). After Rule 3.403(e)(11)'s adoption, the Comptroller began sourcing receipts from licensing trademarks, franchises, and licenses according to their place of use, like patents and copyrights. Receipts from licensing other types of intangible assets, however, continued to be sourced to the location of the payor under the catch-all provision pertaining to other business. Comptroller letter rulings from the period confirm this practice. Concerning the licensing of data, the Comptroller issued the following guidance in 1990: ... gross receipts from [licensing seismic data] are from a license to use the geophysical information. For franchise tax purposes, the gross receipts from the licensing of the use of the information would be considered receipts from the sale of an intangible and would be allocated to the legal domicile of the payor. Comptroller Letter Ruling 9005L1019F09 (5/1/1990); see also Comptroller Letter Ruling 9103L1087B07 (3/1/1991) (issuing similar ruling to another licensor of seismic data). These rulings recognized that Rule 3.403(e)(11) [6] did not apply to the receipts because the customers used seismic data rather than the license conveying the data. The Legislature did not amend the sourcing statute to match the Comptroller's sourcing rule on trademarks, franchises, and licenses until 1997. After this amendment, subsection (4) of the sourcing statute provided that gross receipts of a corporation from its business done in this state [includes] the corporation's receipts from ... the use of a patent, copyright, trademark, franchise, or license in this state ... Act of May 20, 1997, 75th Leg., R. S., ch. 1185, § 5, 1997 Tex. Gen. Laws 4569, 4570. The amendment equalized the tax treatment among similar intangible assets by adding licenses, trademarks, and franchises to the provision governing patents and copyrights. Id. Although other amendments to the franchise tax have followed, the sourcing statute has not materially changed since 1997. Gross receipts derived from a license continue to be sourced to Texas when the license is used in this state. TEX. TAX CODE § 171.103(a)(4).