When a company both gathers/analyzes seismic data and licenses it, which receipts are apportioned as services and which as a license for Texas franchise tax?

Plain-English summary

A tax adviser asked how a client's receipts from geophysical/seismic data should be apportioned for the (pre-2008) Texas franchise tax. Unlike the pure data-license operation in the same-day companion letter (STAR Accession No. 200212624L), this company both gathers and analyzes the data. The Comptroller drew a line down the middle: contract work for a specific customer is a service; licensing data it gathered on its own is a license.

• The facts. The client ("Company") plans, acquires, processes, interprets, and markets non-exclusive surveys worldwide, and also provides proprietary seismic acquisition and processing services plus gravity and aeromagnetic surveys. It then licenses the non-exclusive seismic data and associated products it has gathered and analyzed to the oil and gas industry, delivering the information on magnetic tape or disc.
• Work done for a specific customer = a service. If the Company contracts to do specific seismic data work for a customer, those receipts are for services and are apportioned to the location where the service is performed. The Company's Texas receipts equal the fair value of the services it renders in Texas (Rules 3.546(e)(38) and 3.557(e)(33)).
• Licensing data not obtained for any specific customer = a license. To the extent the seismic data is not obtained for any specific customer, the receipts are treated as coming from the use of a license and are included in Texas receipts to the extent the license is used in Texas (Texas Tax Code Sec. 171.103(4) for taxable capital and Sec. 171.1032(a)(4) for earned surplus; Rule 3.549(e)(30)(A)(iii)).
• This response is fact-specific. The Comptroller noted it is based on the facts presented and current law, and the answer could change if the facts differ.

Currency note: This applies the pre-2008 franchise tax's apportionment rules, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Companies that both perform data work and license data libraries

The key question is who the work was for. Data you gathered and processed on assignment for a particular customer generates service revenue - apportioned to where your people did the work, measured by the fair value of the Texas-performed services. Data you gathered speculatively and later license to whoever wants it generates license revenue - apportioned to Texas to the extent the license is used here. The same physical deliverable (a tape or disc of seismic data) can fall on either side depending on that distinction.

Companies with a mixed revenue model

Track custom/contract engagements separately from speculative data-library licensing, because they apportion under different rules. The companion ruling issued the same day (200212624L) addresses a company whose only activity was licensing pre-collected data - a pure "license" case with no service split.

Accountants and tax professionals

Bifurcate the receipts. Apply the where-performed service rules (3.546(e)(38)/3.557(e)(33)) to customer-specific engagements and the used-in-Texas license rules (Sec. 171.103(4)/171.1032(a)(4); Rule 3.549(e)(30)(A)(iii)) to non-customer-specific data licensing.

Common questions

Q: Is licensing seismic data always apportioned the same way?
A: No. Work performed for a specific customer is a service (apportioned where performed); licensing data not obtained for any specific customer is a license (apportioned to the extent used in Texas).

Q: How are Texas service receipts measured here?
A: By the fair value of the services the company renders in Texas (Rules 3.546(e)(38), 3.557(e)(33)).

Q: How does this differ from the same-day companion letter (200212624L)?
A: That company's only activity was licensing pre-collected data it did not analyze - a pure license case. This company also performs custom work, so its customer-specific receipts are apportioned as services.

Citations and references

Statutes and rules:

• Texas Tax Code Sec. 171.103(4) - Texas receipts include receipts from the use of a license used in Texas (taxable capital)
• Texas Tax Code Sec. 171.1032(a)(4) - same, for earned surplus
• 34 Tex. Admin. Code Sec. 3.549(e)(30)(A)(iii) - license receipts apportioned to Texas to the extent the license is used in Texas
• 34 Tex. Admin. Code Secs. 3.546(e)(38), 3.557(e)(33) - services apportioned to where the service is performed

Related ruling (described in prose, not linked):

• STAR Accession No. 200212624L - same-day companion letter on a company that only licenses pre-collected data it does not analyze

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200212623L

Original ruling text

December 6, 2002

Dear **:

Thank you for providing the follow-up information I requested concerning your
client's proper treatment of gross receipts for apportionment purposes received
from licenses of seismic data and associated products. I apologize for the
delay in getting back to you on this matter.

You have indicated your client, ** ("Company"), specializes in the
planning, acquisition, processing, interpretation, and marketing of
non-exclusive surveys worldwide. Company also provides proprietary seismic
acquisition and processing services and gravity and aeromagnetic surveys.

Company then licenses non-exclusive seismic data and associated products that
Company has gathered and analyzed to the oil and gas industry. Company
provides the relevant information on magnetic tape or disc.

You have requested our agency address exactly how the receipts from the
licensing of the use of geophysical information, presented to the customer on
magnetic tape or disk, are apportioned.

Response:

Company does the relevant research for geophysical data in various
jurisdictions to gather all of the information. Company then analyzes the data
and provides it to customers on magnetic tape or disk. Company generates gross
receipts when customers pay Company for the license to use the information.

If Company contracts to do specific seismic data work for a customer, the
receipts Company receives from that customer are for services and should be
apportioned to the location where the service is performed. See Comptroller's
Rule Section 3.546(e)(38) and Rule Section 3.557(e)(33). Accordingly, Company
will determine Texas receipts based on the fair value of the services that
Company renders in Texas for the customer.

To the extent the seismic data is not obtained for any specific customer, the
gross receipts should be considered receipts from the use of a license. These
receipts should be included in Texas receipts to the extent the license is used
in Texas. See Texas Tax Code ("TTC") Section 171.103(4); TTC Section
171.1032(a)(4); and Rule Section 3.549(e)(30)(A)(iii).

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you have any questions or need additional information, please call me at
1.800.531.5441, extension 34629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division