New York Advisory Opinion TSB-A-09(14)C: How are royalty receipts from licensing intellectual property allocated to New York for the Article 9-A business allocation percentage?
Plain-English summary
A corporation owns and licenses artistic and literary intellectual property (much of it copyrighted or trademarked) to manufacturers who make consumer products -- clothing, toys, fabrics, home decor -- based on it. Its royalties are calculated as a percentage of each licensee's net sales. It asked how to allocate those royalty receipts to New York for the receipts factor of the Article 9-A business allocation percentage (BAP).
The Department concluded the royalties are sourced to where the licensee sells the goods. The BAP receipts factor (Tax Law section 210.3(a)(2)) divides New York business receipts by total business receipts. Royalties for the use of a copyright are allocable to New York to the extent the copyright is used in New York, and a copyright is "used" where the activities relating to its use are carried on (20 NYCRR 4-4.4(c)); royalties from non-copyrighted IP are allocated where the receipts are earned (20 NYCRR 4-4.6). With no regulation pinpointing where copyright use occurs, the Department applied the reasoning of the Disney ALJ determination (Feb. 12, 2004): where royalties are based on a percentage of the licensee's sales, the income is earned where the licensee sells the goods -- not where they are manufactured -- because that best reflects the economic activity the licensor benefits from. So if a licensee sells the products in New York, the licensor allocates those royalties to New York. If a licensee does not provide a breakdown of sales locations, the licensor may allocate to the licensee's billing address.
What this means for you
IP owners and licensors
Royalties calculated on your licensees' sales follow those sales geographically. Build sales-location reporting into your license agreements; without it, you fall back to the licensee's billing address, which may over- or under-state New York.
Accountants and tax professionals
The Disney sourcing rule governs sales-based royalties: source to the licensee's point of sale, not the place of manufacture. The same destination-of-sale logic applies to both copyrighted (use-based) and non-copyrighted (earned-in-NY) royalties when the fee is a percentage of sales.
Common questions
Q: Where are licensing royalties allocated for New York franchise tax?
A: To where the licensee sells the products generating the royalty, since the fee is based on the licensee's sales.
Q: What if the licensee doesn't report where it sold the goods?
A: The licensor may allocate the royalties to the licensee's billing address.
Citations and references
- Tax Law § 210.3(a)(2) (apportionment; receipts factor of the business allocation percentage)
- 20 NYCRR 4-4.4(c) (royalties for the use of a copyright; used where related activities are carried on)
- 20 NYCRR 4-4.6 (receipts from non-copyrighted property earned in New York)
- Matter of Disney, ALJ Determination No. 818378 (Feb. 12, 2004)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2009.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a09_14c.pdf
Original ruling text
New York State Department of Taxation and Finance
Office of Counsel
Advisory Opinion Unit
TSB-A-09(14)C
Corporation Tax
August 5, 2009
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C071227A
A petition dated December 21, 2007 requests an advisory opinion regarding how royalty receipts
earned from the licensing of the Petitioner’s intellectual property should be allocated to New York for
purposes of determining the receipts factor of the business allocation percentage (BAP). The Petitioner’s
receipts will be allocated to New York based on where the activity that generates the licensee’s fee
occurs. In this case, the fee is generated where the products containing or using the Petitioner’s
intellectual property are sold.
Facts
The Petitioner is a corporation subject to the Article 9-A general business corporation franchise
tax. The Petitioner owns and licenses artistic and literary intellectual property. A majority of the
property is copyrighted or trademarked. The Petitioner and its corporate affiliates have developed the
property and the Petitioner licenses this property to businesses (licensees) that manufacture, distribute and
sell consumer products based on the Petitioner’s intellectual property. The consumer products include
clothing, home decorating items, toys, and fabrics. The Petitioner’s receipts are derived primarily from
the royalties charged for the licensing of this property.
The Petitioner’s standard licensing agreement provides that royalties are calculated by
multiplying the licensee’s net sales of licensed products by a royalty rate percentage. Also, each licensee
pays the Petitioner a minimum royalty guarantee. A portion of this guarantee is due at the time the
agreement is signed and the balance is due as agreed to by the parties. The licensee may subcontract with
third-party manufacturers for the actual manufacturing of the licensed products. Subcontractors are
prohibited from sub-licensing or further subcontracting, and their relationships with the licensees cannot
be on a royalty basis. No matter who manufactures the products, the royalties paid to the Petitioner are
based on the net sales of the licensee.
Licensees are required to furnish the Petitioner with annual royalty reports detailing the licensee’s
net sales and projecting anticipated sales and future royalties. The Agreement requires the licensees to
report sales on a retailer-by-retailer basis to the Petitioner and to maintain detailed, accurate, and
complete records and books of account covering all transactions relating to the agreement. Retailers
include national and international retailers.
Analysis
Section 210.3(a)(2) of the Tax Law provides the apportionment formula for purposes of
computing the receipts factor of the BAP. The BAP is determined by dividing a taxpayer’s New York
business receipts by its total business receipts within and without New York. Receipts from the license to
use the Petitioner’s copyrighted property will be allocable to New York to the extent the use of the
copyright occurs in New York. New York regulation § 4-4.4(c) provides that royalties include all
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amounts received by a taxpayer for the use of a copyright, whether or not the copyright was issued to or is
owned by the taxpayer. Also, a copyright is considered to be used in New York to the extent the activities
relating to the use of the copyright are carried on in New York. Receipts from the license to use the
Petitioner’s non-copyrighted intellectual property will be allocated to New York State when the receipts
are earned in New York. (20 NYCRR § 4-4.6).
Apart from the general rules above, there is no regulation that determines when the use of
copyrighted property occurs in New York or where receipts from non-copyrighted intellectual property
are earned. However, similar facts were presented to and addressed by the Administrative Law Judge
in the Matter of Disney ALJ Determination No. 818378 (Feb. 12, 2004). The reasoning in that
determination re-affirms the Department’s interpretation of when the use of copyrighted property occurs
in New York and where receipts from non-copyrighted intellectual property are earned.
In Disney, the taxpayer, through its consumer products business, licensed and distributed the
name of Walt Disney, its animated character likenesses, and its visual and literary property, songs, and
music to manufacturers worldwide. Disney’s licensing activities generated royalties based on a fixed
percentage of the wholesale or retail selling price of the licensee’s products. Disney allocated its royalty
receipts to New York if the licensee having the right to produce goods with Disney’s characters or brands
used a New York business location as its address in the licensing agreement. Disney sought to change its
method of allocation by using the location of where the property containing the Disney characters or
brands was manufactured.
The Administrative Law Judge rejected Disney’s request to change its method of allocating
receipts from royalty income to where the goods were manufactured and noted that the taxpayer’s
licensing fees were based upon a percentage of the licensee’s net invoiced billings on sales. Significantly,
the ALJ noted that if it was at all administratively practical, the location of the licensee’s sales of goods
would be a better way to allocate royalty income, because it would be more reflective of the geographic
location of its economic activities, i.e., the sales, from which the taxpayer directly benefits. The ALJ
further noted that it is not the manufacturing of goods that is relevant for determining the portion of
royalty income to be allocated to New York when such income is based on the sales of such goods. No
exception was taken on appeal regarding the allocation rule for royalty income.
As described above, the Petitioner’s receipts are from licensing activities similar to those
described in Disney. As in Disney, the licensees are paying royalties to the Petitioner because of the
buying public’s awareness of the Petitioner’s intangible property on or in the licensees’ products, and
income is earned where those products are sold. Therefore, it is reasonable to apply the sourcing rule
upheld in the Disney determination to the Petitioner’s facts. The Petitioner’s receipts from licensing its
copyrightable property should be allocated in accordance with where the property is used. In this case,
the property is used where the activity that generates the licensing fee occurs, that is, where the licensee
sells the goods. Likewise, the Petitioner’s receipts from licensing its non-copyrighted property will be
allocated where the receipts from that property are earned. In this case, the Petitioner’s receipts are also
earned at the location where the licensee sells the property. Therefore, if the licensee sells the Petitioner’s
copyrighted and non-copyrighted intellectual property in New York, the Petitioner will allocate the
royalties from that property to New York for purposes of determining its receipts factor. If the licensee
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does not provide the Petitioner with a breakdown of the locations of its sales, it is appropriate for the
Petitioner to allocate the royalties it receives to the billing address of the licensee.
DATED: August 5, 2009
NOTE:
/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to
the facts set forth therein and is binding on the Department only with respect to
the person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued
or for the specific time period at issue in the Opinion.