Were textbook royalties paid to a nonresident author California-source income when the writing and revisions were performed under contract in California?

Plain-English summary

California Legal Ruling 345 treated a nonresident textbook author's royalties as compensation for services performed where the writing occurred.

The author wrote and revised the textbook under a continuing contract with the publisher. FTB distinguished those payments from royalties received for selling rights to an independently developed finished product.

Because the 1952, 1957, and 1962 editions were written in California, all royalties from those editions were California-source income. Because the 1966 revision was written half in California and half outside the state, half of its royalties were California-source and half were not.

Facts addressed by the ruling

The taxpayer was a nonresident co-author receiving royalties from a New York publisher.

The science textbook first appeared in 1952 and was completely revised and republished in 1957, 1962, and 1966. All work was performed under one continuing publisher contract.

The taxpayer performed all work on the first three editions in California while a resident. After changing residence, the taxpayer performed half of the work on the 1966 edition in California and half outside California.

Why the royalties were service income

FTB drew a distinction between:

• payment for rights to an independently developed finished product; and
• payment for writing and revision work required by an existing contract.

The ruling placed this taxpayer in the second category. The royalty form did not change the service character of the contracted work.

Service compensation was sourced to the place where the services were performed.

Edition-by-edition result

The remaining half of the 1966 royalties was not California-source income and was not taxable by California to the nonresident recipient under the ruling.

What this means for you

Authors and content creators

The label "royalty" did not decide sourcing. Contracted creative work could be treated as services when the payment arose from writing or revising under an existing agreement.

Nonresident taxpayers

Changing residence did not erase California source from work already performed in California. Later payments remained connected to the location of the underlying services.

Accountants and tax professionals

Review when the work was created, whether it preceded or followed the contract, which services each payment compensates, and where those services were physically performed. Allocate mixed-location work using supportable records.

Common questions

Q: Were the payments treated as ordinary intellectual-property royalties?

A: No. FTB treated them as compensation for contracted writing and revision services.

Q: Did the author's later nonresident status make earlier-edition royalties non-California income?

A: No. The earlier editions were written entirely in California, so their royalties remained California-source under the ruling.

Q: Why was only half of the 1966 royalty taxable by California?

A: Half of the revision work was performed in California and half outside the state.

Q: Would an independently completed work receive the same treatment?

A: The ruling expressly distinguished the sale of rights to an independently developed finished product from its contracted-writing facts.

Q: Does this establish current sourcing for every royalty contract?

A: No. It is a fact-specific 1970 private ruling, and current characterization and sourcing rules must be checked.

Citations and references

• Appeal of Charles W. and Mary D. Perelle (Cal. St. Bd. of Equal., December 17, 1958)

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 345

Original ruling text

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Legal Ruling 345

California Franchise Tax Board

Legal Ruling No. 345

September 15, 1970

NONRESIDENTS – SOURCE OF INCOME (PRIVATE)

Royalty income received by a nonresident from the sale of textbooks written in California under a pre existing contract with the publisher is California source income in the nature of compensation for services performed in this state.

Advice has been requested regarding the taxability of royalty payments received from a New York publisher by a nonresident co author of a science textbook first published in 1952 and completely revised and republished in 1957, 1962, and 1966. Taxpayer’s writing, all done under a continuing contract with the publisher, was performed in California while a resident for the 1952, 1957, and 1962 editions, and one half in California and one half out of state after a change of residence for the 1966 edition.

Unlike royalty income derived from the sale of rights to an independently developed finished product, payments for writing and revising and textbook under contracts are compensation for services and thus taxable at the place where the services are performed. Appeal of Charles W. and Mary D. Perelle, Cal. St. Bd. of Equal., December 17, 1958, CCH 201 194, P H 58, 144. Accordingly, the royalties received for the 1952, 1957 and 1962 editions, and one half the royalties received for the 1966 edition are income from a California source and taxable in this state. The other one half of the royalties from 1966 edition is not income from a source within this state, and not taxable by California to its nonresident recipient.

Last updated: 12/23/2025