Were franchise royalty fees for territorial and trademark rights taxable when a real-estate magazine franchisor also printed the magazines?

Plain-English summary

A franchisor granted exclusive geographic rights to publish and distribute free real-estate advertising magazines. Franchisees paid page-based printing charges and a separate royalty for territorial rights, logos, and trademarks; the royalty was charged whether or not the franchisor did the printing.

When a franchisee purchased printing from the franchisor, the required royalty was part of the taxable sale and subject to use-tax collection. The royalty was not taxable when the franchisee paid it without buying printing or receiving other tangible personal property from the franchisor.

If the printing itself qualified for the cited periodical or printed-sales-message exemption, the related royalty became part of those exempt gross receipts rather than a separate taxable amount.

Citations and references

• California Revenue and Taxation Code sections 6012, 6051, 6362(a), and 6379.5 (as cited)
• California Civil Code section 1656.1 (as cited)
• California Sales and Use Tax Annotation 295.1690 (as cited for services required as a condition of purchase or functional use, with the source explaining that annotations guide prior staff decisions)
• Sept. 8, 1990 letter requesting an opinion on royalty fees charged to real-estate magazine franchisees — letter and supporting records not reproduced in the official PDF
• Exclusive-area franchises, page-based publishing fee, percentage royalty for territorial rights, logos, and trademarks, local-printing option, free magazine distribution, and use tax collected on royalties and printing — facts supplied; franchise agreements, specifications, magazines, advertisements, invoices, royalty calculations, tax records, and local-printing records not reproduced in the official PDF
• Board records said some publications qualified as periodicals or printed sales messages — conclusion stated; publication identities, exemption applications, rulings, records, and supporting facts not reproduced in the official PDF
• Official Annotation 295.0545's real-property magazines, independent advertisers, franchises, territorial limits, page fee, percentage royalty, intangible rights, printing distinction, periodical and printed-sales-message exemptions, and Oct. 26, 1990 date — annotation omits the Sept. 8 request, collection practice, Annotation 295.1690 and its provenance statement, unidentified Board exemption records, missing agreements and transaction records, and later outcome and supplies no additional franchise or tax record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0545.pdf

Original ruling text

295.0545

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 327-3400

October 26, 1990

Mr. D. A--- H--H--- and L--- P--- Co.
XXXX --- Circle SW
---, FL XXXXX
Dear Mr. H---:
I am writing in response to your September 8, 1990 letter requesting a legal opinion regarding the applicability of California Sales and Use Tax to “royalty fees” charged by H--- and L--- P--- Corporation (H&L) to its franchisees. The facts, as I understand them, are as follows. H&L publishes magazines which advertise real property for sale by independent brokers or others. H&L grants exclusive franchises in specified geographical areas for publication and distribution of magazines advertising property within the specified area. A franchisee’s income derives from the sale of advertisements to brokers in his or her area. H&L publishes magazines according to the franchisees’ specifications regarding format, number of pages, and number of copies. Generally, a franchisee chooses to publish on a monthly or bi-weekly basis. The magazines are eventually distributed to the public free of charge. The H&L franchisees’ pay H&L a fee, based on number of pages, to publish the magazines. In addition to this fee, H&L charges franchisees a “royalty fee” based on a “percentage of the suggested retail sale for the pages of advertising”. The “royalty fee” is for “intangible rights such as the exclusive territorial rights, logos, trademarks, etc.” Franchisees have a right to print locally, however the royalty fee is charged whether or not H&L does the printing. H&L has been collecting and remitting California use tax on royalty fees. You have asked us to confirm that “the royalty charges are for intangible rights and not for any tangible personal property and, therefore, are not subject to the State’s sales and use tax. We do not concur in your opinion. Unless specifically excluded or exempted from taxation by statute, all gross receipts from retail sales or purchases for use within this state of tangible personal property are subject to either sales or use tax. (Rev. & Tax. Code § 6051.) Although the legal obligation to pay sales tax is on the retailer, Civil Code Section 1656.1 provides that the retailer may seek sales tax reimbursement from the purchaser. The definition of “gross receipts” includes “any services that are part of the

Mr. D. Alan Holland

-2-

October 26, 1990
295.0545

sale.” (Rev. & Tax. Code § 6012). Services that are part of the sale include any “for which the purchaser must pay as a condition of the purchase and/or functional use of the property.” (Annotation 295.1690. The annotations provide guidance to previous staff decisions.) As I understand it, H&L presently collects use tax on royalty fees as well as printing charges. This practice is correct. There are only two situations in which H&L would not be obligated to collect a use tax on the royalty fee. The first is where the franchisee does not purchase printing from H&L and the royalty fee is paid absent any transfer of tangible personal property. The second situation is where the printing is itself exempt from use tax. According to our records, some H&L publications qualify for tax exemptions either as “periodicals”, under Rev. & Tax. Code § 6362(a), or as “printed sales messages”, under Rev. & Tax. Code § 6379.5. In these situations, the royalty fee is included as part of those gross receipts exempt from taxation. Please feel free to contact us again if you have further questions. Sincerely,

Stella Levy
Tax Counsel

SL:cl
3600I