Was the royalty income a retired professor received from his patented glaucoma treatment, after he became a nonresident of New York, taxable as New York source income?

Plain-English summary

Petitioner was a professor at a university until he retired in 1997. While employed there, he conducted research on his own initiative - his employer did not require it, did not have any legal claim to whatever came out of it, and Petitioner was never obligated to disclose discoveries or hand over any resulting patents. That research led him to discover a treatment for glaucoma, which he patented. In 1982 he voluntarily assigned all his rights in the patent to the university in exchange for a share of the royalties the university would later collect. The patent was marketed starting in 1996, and royalty payments began flowing to Petitioner.

Petitioner was a New York resident while employed at the university, but in 1998 he became a nonresident. He did not file New York personal income tax returns for 1999 through 2005. He asked the Department whether the royalty payments he received while a nonresident were income derived from New York sources and therefore subject to New York personal income tax.

The Department concluded they were not. First, the royalties were not wages or compensation for services: a license contract for a patent held by an employee is treated as separate and distinct from the employment contract, and because Petitioner's research wasn't required by or for the university's benefit, the royalties didn't arise from an employment relationship at all. Second, looking at the royalties as income from intangible property, New York only taxes a nonresident's intangible-property income to the extent that property is employed in a business, trade, profession, or occupation carried on in New York. Petitioner's research activity did not amount to carrying on a profession in New York, and after he became a nonresident he was not using the patent in any New York business, trade, profession, or occupation. So the royalty payments accruing to him as a nonresident were not New York source income.

Because no New York tax was owed on the royalty income, the Department also held that Petitioner's separate questions about penalty and interest were moot - those only matter if an underlying tax liability exists.

What this means for you

Retired academics and researchers with patent or royalty income

If you did research on your own initiative - not required by or for your employer's benefit, and without your employer having any legal claim to the resulting intellectual property - royalties from a patent you later assigned generally aren't treated as employment compensation. That distinction matters for nonresidents, since New York can only tax a nonresident's compensation for services actually performed in the state.

Nonresidents receiving royalty income tied to a New York history

Once you become a nonresident, royalty income from intangible property (like a patent) is New York source income only if that property is currently employed in a business, trade, profession, or occupation you're carrying on in New York. A New York connection from years earlier - such as where the underlying research took place - does not by itself make ongoing royalty payments taxable after you've left the state.

Common questions

Q: Why weren't the royalty payments treated as wages or employment income?
A: Because a license contract for a patent held by an employee is legally separate and distinct from the employment contract, and Petitioner's research was not required by or for the benefit of the university - the university had no legal claim to the patent, and the assignment was voluntary.

Q: Petitioner earned the patent through research done in New York. Why doesn't that make the royalties New York source income?
A: Carrying on research in New York State did not, by itself, constitute conducting a profession in the state. And after Petitioner became a nonresident, he was no longer employing the patent in any business, trade, profession, or occupation carried on in New York, which is what the statute requires for taxing a nonresident's intangible-property income.

Q: Did the Department decide anything about penalty or interest?
A: No - it held those questions moot, since Petitioner owed no New York tax on the royalty income in the first place.

Q: Would the answer be different if the university required Petitioner's research as part of his job?
A: The Department's reasoning turned on the fact that the research wasn't required by or for the university's benefit and the university had no legal claim to the resulting patent. Royalties tied more closely to required job duties could be analyzed differently.

Citations and references

• Tax Law § 631(a)(1) - New York adjusted gross income of a nonresident includes income derived from or connected with New York sources
• Tax Law § 631(b)(1)(B) and (b)(2) - income from intangible property is New York source income only to the extent the property is employed in a business, trade, profession, or occupation carried on in New York
• 20 NYCRR 132.4(b) - a nonresident employee's compensation is New York source income only to the extent services were rendered in New York
• 20 NYCRR 132.4 - defines what it means to carry on a business, trade, profession, or occupation within New York State
• Rev. Rul. 68-499, 1968-2 C.B. 421 - royalties paid for an employee's patent license are not wages when the license contract is separate and distinct from the employment contract
• Matter of Morton Davis, State Tax Commission, December 24, 1982, TSB-H-82(334)I - not all scholarly research by an academician is required by or for the employer's benefit

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a10_3i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(3)I
Income Tax
June 18, 2010

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I081119A

On November 19, 2008 the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted. Petitioner asks whether royalty income that he received while a
nonresident of New York State constituted income derived from New York sources. The royalty payments
were income from intangible property that was not employed in a business, trade, profession or occupation
carried on in the State; therefore, the income is not subject to New York personal income tax. Since
Petitioner owes penalty or interest only if he owes tax, his inquiry about penalty and interest is moot.
Facts
Petitioner was employed as a professor at location of University redacted (University) for a number
of years until he retired in 1997. While not required to do so by his employer, Petitioner conducted research.
This research resulted in his discovery of a treatment for glaucoma, which he patented. Petitioner was not
obligated to advise his employer of discoveries resulting from his research nor was he obligated to transfer to
his employer any patents resulting from his research. In 1982 Petitioner assigned all his rights to the patent
to University in exchange for a portion of the royalties that the University would collect. Petitioner’s
assignment of his patent to University was voluntary; the University had no legal claim to the patent as
Petitioner’s employer. In 1996 the patent was marketed and Petitioner began to receive royalty payments.
Petitioner was a resident of New York State while he was employed by University. In 1998 he
became a nonresident of the State. He did not file New York State personal tax returns for the years 1999
through 2005.
Analysis
Tax Law §631(a)(1) provides that the New York adjusted gross income of a nonresident individual
shall include, among other items, the sum of the net amount of items of income, gain, loss, and deduction
entering into his or her federal adjusted gross income, as defined in the laws of the United States for the
taxable year, derived from or connected with New York sources.
The New York adjusted gross income of a nonresident individual rendering personal services as an
employee includes the compensation for personal services entering into his Federal adjusted gross income,
but only if, and to the extent that, his services were rendered within New York State. 20 NYCRR 132.4(b).
Not all payments made by an employer to an employee constitute remuneration for services performed by an
employee. For example, royalties paid by a business for the license of a patent held by an employee do not
constitute wages if the license contract is separate and distinct from the employment contract. Rev Ruling
68-499, 1968-2 C.B. 421. Further, not all scholarly research performed by an academician is required by or
for the benefit of the academician’s employer. Matter of Morton Davis, State Tax Commission, December
24, 1982, TSB-H-82(334)I. Since Petitioner’s research was not required by or for the benefit of University,
as evidenced by the University’s lack of a legal claim to the intellectual property created by Petitioner’s
research, the royalties Petitioner received from University did not arise from an employment relationship.
Consequently, the payments did not constitute remuneration for services performed by an employee.

-2-

TSB-A-10(3)I
Income Tax
June 18, 2010

Items of income, gain, loss and deduction "derived from or connected with New York sources"
include those that are attributable to a business, trade, profession or occupation carried on in New York or
income from intangible personal property to the extent that such income is from property employed in a
business, trade, profession, or occupation carried on in New York (see Tax Law §631[b][1][B] and [b][2]).
A business, trade, profession, or occupation is carried on within New York State by a person who occupies,
has, maintains or operates desk space, an office, a shop, a store, a warehouse, a factory, an agency or other
place where such person’s affairs are systematically and regularly carried on. 20 NYCRR 132.4. A taxpayer
may enter into transactions for profit within New York State and yet not be engaged in a trade or business
within New York State. Id. Petitioner’s performance of research science in the State did not constitute the
conduct of a profession in the State; therefore, the assignment of the patent resulting from his research was
not attributable to a profession carried in New York. Nor did Petitioner, after he became a nonresident,
“[employ] in a business, trade, profession, or occupation carried on in” New York the intangible property
that entitled him to royalty payments. Accordingly, the royalty payments that accrued to him after he
became a nonresident were not New York source income.
Because Petitioner owes no New York income tax on his royalty income received as a nonresident,
the questions as to penalty and interest are moot.

DATED: June 18, 2010

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 & F, April 8, 1994, TSB-A-94(7)I. Therefore, the trusts’ income is
not subject to New York income tax. time period at issue in the Opinion.