Were royalties paid to a nonresident for an exclusive territorial license to conduct copyrighted courses in California California-source income?

Plain-English summary

California Legal Ruling 145 held that royalties paid to a nonresident for use of copyrighted courses in a California territory were not California-source income.

The ruling required more than local use of the copyright. The intangible asset itself had to become sufficiently localized to acquire a California taxable or business situs.

An exclusive territorial license did not create that localization on the stated facts, and the copyright owner did not otherwise conduct a California business in a way that sourced the royalties here.

Facts addressed by the ruling

The nonresident taxpayer licensed X to conduct copyrighted courses in a prescribed California area.

The agreement appeared to give X an exclusive right to conduct the classes within that territory. The taxpayer retained the right to conduct certain other courses there but apparently never exercised it.

X paid a royalty equal to 12% of the courses' gross proceeds.

Why the payments were royalties

The course material was copyrighted. The ruling therefore characterized income paid for its use as royalty income.

The remaining question was where that intangible-generated income had its source for a nonresident owner.

Historical business-situs rule

Former regulation 17211-17214(b) treated royalties as California-source income when the income-producing intangible had a taxable or business situs in California.

Without such a situs, the ruling said the income was taxable at the owner's domicile.

Even a nonresident conducting some California trade or business needed additional localization of the intangible before the asset itself acquired a California business situs.

Why territorial exclusivity was insufficient

Giving X an exclusive right to use the copyright in a particular California area did not localize the copyright to the extent of that use.

The taxpayer's unexercised right to conduct other courses and the absence of sufficient owner-side California business activity reinforced the conclusion.

The royalties therefore were not taxable under the historical Personal Income Tax Law as California-source income.

What this means for you

Nonresident licensors

Under the historical ruling, licensing an intangible for exclusive use in California did not automatically give the intangible a California business situs.

Copyright owners and course creators

The payment formula—12% of California course receipts—did not by itself determine source. The ruling focused on localization of the copyright and the owner's business activity.

Accountants and tax professionals

Review license exclusivity, territory, retained rights, owner activity, management and control of the intangible, and current sourcing rules. Modern law may source royalties differently from this 1958 analysis.

Common questions

Q: Were the payments treated as royalties?

A: Yes, because they were paid for use of copyrighted courses.

Q: Did exclusive California use make them California-source?

A: No. The territorial license did not sufficiently localize the copyright under the historical rule.

Q: What was the royalty rate?

A: 12% of the course's gross proceeds.

Q: Did the copyright owner conduct courses in the licensed area?

A: The owner retained a right to conduct certain other courses but apparently never exercised it.

Q: What would have mattered under the regulation?

A: Whether the copyright acquired a California taxable or business situs or the owner's California activity otherwise sourced the income here.

Citations and references

• Former California regulation 17211-17214(b)
• Hazeltine Corp. v. McColgan, Sacramento Superior Court No. 63171
• Rainier Brewing Co. v. McColgan, 94 Cal. App. 2d 118

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 145

Original ruling text

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Legal Ruling 1958-145

California Franchise Tax Board
Legal Ruling No. 145

June 27, 1958

Royalty Income: Source

Royalty income received by a non-resident from an exclusive licensing agreement of a copyright item for use in California is not income from sources in this state.

Taxpayer, a nonresident of California, licensed X to conduct his copyrighted courses in a prescribed area of California. Although the contract appears to give X an exclusive right to conduct the classes in X's particular area, taxpayer retained the right to conduct certain other courses in said area, however it appears that this right was never exercised. Under the contract X agreed to pay a royalty of 12% of the gross proceeds of the course. Advice is requested as to whether the royalties are income from California sources.

As the taxpayer’s courses are copyrighted, income received from the use of the copyright is royalty income. Under Regulation 17211-17214(b) royalties are taxable to a nonresident if the intangible producing the income has a taxable or business situs in this State, if not, such income is taxable at the domicile of the owner. Under said Regulation it seems apparent that despite the fact that a nonresident may conduct a trade or business in California, there must be a further "localization" of the intangible asset before it acquires a business situs within the State. The fact that X acquired an exclusive right to use the copyright in a given area does not "localize" the copyright to the extent of its use in that area. Hazeltine Corp. v McColgan, Sacramento Superior Court, Number 63171; Rainer Brewing Co. v McColgan, 94 CA2d 118. Nor does the taxpayer conduct a trade or business in California in such a manner as to give the income a source in this State. Under the circumstances the royalties received from X are not taxable under the Personal Income Tax Law as income from California sources.

Last updated: 09/24/2025