Did selling future per-scan royalty rights change the original medical-equipment seller's sales-tax reporting duty?

Plain-English summary

A medical-imaging-equipment seller received $1 million plus per-scan royalties based on patient use over 60 months. It later sold a substantial portion of its future royalty rights to a financial-services company.

The assignment itself transferred an intangible right and did not create sales tax on the amount paid for that right. But it did not alter tax on the original equipment sale: the equipment seller still had to report the contract royalties as taxable when they became definite, regardless of who received them.

The financial-services assignee did not report sales tax on royalty collections; the original seller retained that reporting obligation.

Citations and references

• California Sales and Use Tax Annotation 295.0570 (Jan. 4, 1979) (as cited)
• April 14, 1988 San Jose Auditing memorandum asking several questions about assignment of royalty rights and sales-tax liability — questions summarized in the opinion; memorandum and supporting records not reproduced in the official PDF
• 1986 $1 million magnetic-resonance-imaging-equipment sale contract with per-scan royalties over sixty months, Oct. 1, 1987 sale of substantial future royalty rights, and prior tax reporting — facts supplied; equipment contract, assignment, invoices, patient or scan records, royalty calculations, payments, returns, and account records not reproduced in the official PDF
• Official Annotation 295.0575's medical equipment, stated price, patient-use royalty, sixty months, sales-tax reporting, finance-company assignment, intangible-asset treatment, seller-versus-assignee reporting duty, and May 17, 1988 date — annotation omits the April 14 request, exact $1 million and Oct. 1 dates, magnetic-resonance equipment, Annotation 295.0570, missing contracts and records, and later outcome and supplies no additional assignment or payment record
• Possible contract performance, assignment payment, per-scan royalty accrual or receipt, amended return, audit, assessment, refund claim, appeal, or other later agency action — not supplied in the official PDF

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/295-0575.pdf

Original ruling text

State of California

Memorandum

To:

San Jose Auditing
District Principal Auditor

From:

David H. Levine
Tax Counsel

Subject:

Board of Equalization

295.0575
May 17, 1988

ATSS 8-485-5550

D---, Inc.
SR -- XX-XXXXXX
This is in response to your memorandum dated April 14, 1988. In 1986, D--- sold magnetic resonance imaging equipment to N--- - M--- for $1,000,000 plus royalties (per scan fees) based on the number of patients examined during a 60-month period. D--- reported sales tax on the $1,000,000 and has been reporting sales tax on the royalties as they have due and payable. On October 1, 1987, D--- sold its rights to a substantial portion of the royalties to H--Financial Services. You ask several questions which can be summarized as, “does the sale of royalties affect D--- sales tax liability?” It does not. D--- sold an intangible right to royalties to H---. Since D--- did not sell tangible personal property to H---, no sales tax liability arises by virtue of that transaction. The relevant sale of tangible personal property is D---’ sale of equipment to N--- - M---. D--- has been properly reporting tax on that sale and should continue to report in the same manner. That is, D--- should report as subject to sales tax the royalties owed by N--- - M--- under the 1986 equipment sale contract as those royalties become definite. (BTLG Annot. 295.0570 [1/04/79].) D--- owes sales tax measured by such royalties without regard to D---’ transfer of its right to those royalties to a third party. To answer to your specific questions, no sales tax applies to any amounts received on the sale of the rights to royalties, and H--- should not report sales tax on the amounts of royalties it receives (D--- must report the applicable tax). If you have further questions, feel free to contact me.

DHL:ss