Are royalties from licensing patents and other intellectual property to manufacturers sourced to New York based on where the licensee manufactures?

Plain-English summary

Corporation X (through PricewaterhouseCoopers), a company domiciled outside New York, earned royalties from licensing product and process patents, trade secrets, and other intellectual property to manufacturer licensees. It asked how those royalties are sourced for the receipts factor of the business allocation percentage.

The Department held:

• Patent royalties are allocated to New York under section 210.3(a)(2)(C) (and 20 NYCRR 4-4.4(c)) when the licensee uses the licensed patents in New York.
• Trade-secret and other IP royalties are not among the enumerated receipts categories, so they are "other business receipts" under section 210.3(a)(2)(D), earned in New York when the licensee uses that IP in New York.
• Because the statute does not say when a licensee "uses" the IP in New York, a reasonable method is to look to where the licensee's manufacturing facility that makes the product using the license is located: in New York means used in New York; outside means used outside.
• Where a licensee makes a product at facilities both within and without New York, the New York portion may be determined by apportioning the royalties for that product.

What this means for you

Royalties follow where the licensee actually makes the product

For New York's receipts factor, patent royalties (and trade-secret/other-IP royalties as "other business receipts") are sourced to New York when the licensee uses the IP here -- and the practical test is where the licensee's plant making the product is located.

Patents and trade secrets land in different statutory boxes

Patent royalties go through section 210.3(a)(2)(C); trade secrets and other IP are other business receipts under section 210.3(a)(2)(D). Both end up sourced by use in New York, but cite the correct provision.

Split when production straddles the border

If a licensee makes the product at plants inside and outside New York, you apportion the royalties attributable to that product between New York and elsewhere.

Common questions

Q: How are patent royalties sourced for New York's receipts factor?
A: To New York under section 210.3(a)(2)(C) when the licensee uses the patents in New York.

Q: What about trade secrets and other intellectual property?
A: Those royalties are other business receipts under section 210.3(a)(2)(D), earned in New York when the licensee uses that IP here.

Q: How do you tell where the licensee "uses" the IP?
A: A reasonable method is to look to where the licensee's manufacturing facility making the product is located, splitting the royalties if production is both in and out of New York.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.3(a)(2)(C) (royalties from patents and copyrights used in New York)
- Tax Law section 210.3(a)(2)(D) (other business receipts earned in New York)
- 20 NYCRR section 4-4.4(c) (royalties from use of patents)
- 20 NYCRR section 4-4.6 (other business receipts)
- Corporation X, TSB-A-02(2)C (Apr. 8, 2002)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a02_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(2)C
Corporation Tax
April 8, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C010117A

On January 17, 2001, a Petition for Advisory Opinion was received from Corporation X, c/o
John M. Allan, PricewaterhouseCoopers, 50 Hurt Plaza Suite 1700, Atlanta, Georgia 30303.
The issue raised by Petitioner, Corporation X, is whether Corporation X’s royalties from the
licenses described below are sourced to the state in which the licensees manufacture products under
the licenses for purposes of computing the numerator of the receipts factor of the business allocation
percentage under Article 9-A of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Corporation X is a corporation organized and commercially domiciled outside of New York.
It has substantial operations outside of New York, and holds a 91 percent interest in several
manufacturing facilities located outside of New York.
In addition to other sources of income, Corporation X has royalty income from licensing
product and process patents, trade secrets and other similar types of intellectual property to affiliated
and non-affiliated corporations (“Licensees”) engaged in the manufacture and sale of tangible
personal property. While many of the licenses are limited to the grant of rights under a single patent,
others grant access to patented and non-patented inventions, drawings, designs, technical
information, and know-how related to the design and production of entire products. The royalty
calculations are generally based on a percentage of the Licensee’s/manufacturer’s wholesale
revenue.
Discussion
Section 210.3(a)(2) of the Tax Law provides that, for purposes of computing the receipts
factor of the business allocation percentage, receipts allocable to New York State include:
(A) sales of tangible personal property where shipments are made to points
within New York;
(B) services performed within New York;
(C) rentals from property situated, and royalties from the use of patents or
copyrights, within New York, and receipts from sales of rights for closed-circuit and
cable television transmissions of an event taking place within the state;

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TSB-A-02(2)C
Corporation Tax
April 8, 2002

(D) all other business receipts earned within New York.
Section 4-4.4(c) of the Business Corporation Franchise Tax Regulations (“Article 9-A
Regulations”) provides that:
Receipts of royalties from the use in New York State of patents and
copyrights are allocated to New York State. Royalties include all amounts received
by the taxpayer for the use of patents or copyrights, whether or not such patents or
copyrights were issued to or are owned by the taxpayer. A patent or copyright is
used in New York State to the extent that the activities thereunder are carried on in
New York State.
In this case, Corporation X has receipts of royalty income from licensing product and process
patents to Licensees engaged in the manufacture and sale of tangible personal property. Pursuant
to section 210.3(a)(2)(C) of the Tax Law and section 4-4.4(c) of the Article 9-A Regulations, such
royalty receipts from the use of such patents are allocated to New York State, and included in the
numerator of the receipts factor, when the Licensee uses the licensed product and process patents
in New York State.
Corporation X also has receipts from licensing trade secrets and other similar types of
intellectual property to such Licensees. Such receipts are not from any of the sources enumerated
in section 210.3(a)(2) of the Tax Law. Therefore, such receipts constitute “other business receipts.”
Pursuant to section 210.3(a)(2)(D) of the Tax Law, the receipts from licensing trade secrets and
other similar types of intellectual property are earned in New York State, and included in the
numerator of the receipts factor, when the Licensee uses the licensed trade secrets and other similar
types of intellectual property in New York State.
Section 210.3(a)(2)(C) and (D) of the Tax Law and sections 4-4.4(c) and 4-4.6 of the Article
9-A Regulations do not provide for a method to determine when a Licensee uses licensed product
and process patents, trade secrets and other intellectual property in New York State. However, a
reasonable method to make such determination is to look to where the Licensee’s manufacturing
facility that makes a product using one or more of Corporation X’s licenses is located. When the
Licensee’s manufacturing facility that makes a product using one or more of Corporation X’s
licenses is located in New York State, Corporation X’s product and process patents, trade secrets
and other intellectual property attributable to such product are considered to be used in New York.
If the Licensee’s manufacturing facility that makes a product using one or more of Corporation X’s
licenses is located outside of New York State, Corporation X’s product and process patents, trade
secrets and other intellectual property attributable to such product are considered to be used outside
of New York.

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TSB-A-02(2)C
Corporation Tax
April 8, 2002

Where a Licensee makes a product using one or more of Corporation X’s licenses at
manufacturing facilities that are located within and without New York State, the portion of the
licensed product and process patents, trade secrets and other intellectual property that are used in
New York State may be determined by multiplying all of Corporation X’s receipts for the taxable
year from each such licensing, by a fraction. The numerator of the fraction is the number of
products manufactured by the Licensee in New York State during the taxable year using each such
license, and the denominator of the fraction is the number of products manufactured by the Licensee
everywhere during the taxable year using each such license.
Note that some other reasonable method to determine when a Licensee uses licensed product
and process patents, trade secrets and other intellectual property in New York State may be used,
in which case Corporation X must submit full details with its return.

DATED: April 8, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.