For Texas franchise tax, how are receipts from licensing seismic data apportioned - by where the license is used or where any service is performed?

Plain-English summary

A tax adviser asked how a client's receipts from licensing seismic data should be apportioned for the (pre-2008) Texas franchise tax. The Comptroller answered that the receipts are treated as coming from the use of a license (an intangible) and are apportioned to Texas to the extent the license is used in Texas.

• The facts. The client ("Company") is a Delaware LLC formed to market seismic data. Its only Texas activity is selling non-exclusive, non-transferable licenses to view seismic data. One member contributed the data when the company was formed; another has the exclusive right to market it. The company licenses previously collected data and does not analyze or manipulate it before delivering it to customers on magnetic tape or disc.
• The apportionment rule. Receipts from the licenses are apportioned to Texas 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; Comptroller Rule 3.546(e)(30)(A)(iii)).
• Any separate services are apportioned differently. If the company performs other services in connection with the license, those receipts are apportioned to the location where the service is performed (Rules 3.546(e)(38) and 3.557(e)(33)).
• 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.

The Comptroller issued a companion letter the same day (STAR Accession No. 200212623L) to a different taxpayer on the closely related question of a company that both gathers and analyzes seismic data - drawing the line between contract services (apportioned where performed) and license receipts (apportioned by where used).

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 license data or other intangibles

If your revenue comes from letting customers use data or another intangible you already own - rather than from performing a service for a specific customer - Texas treated those license receipts under the "used in Texas" test, not by where you delivered the tape or disc. The delivery medium did not control; the character of the transaction (license vs service) did.

Companies that both sell data and perform services

Split the receipts. Money earned from a customer for work you performed is service revenue, apportioned to where you did the work. Money earned from licensing data you already had is license revenue, apportioned to where the license is used. The companion ruling issued the same day (200212623L) walks through exactly that split.

Accountants and tax professionals

Classify each revenue stream before apportioning. For a pure data-license operation like this one, apply Sec. 171.103(4)/171.1032(a)(4) and Rule 3.546(e)(30)(A)(iii) (used-in-Texas). For any bundled service work, apply Rules 3.546(e)(38)/3.557(e)(33) (where-performed).

Common questions

Q: Are seismic-data license receipts apportioned by where the disc is delivered?
A: No. They are apportioned to Texas to the extent the license is used in Texas (Sec. 171.103(4), 171.1032(a)(4); Rule 3.546(e)(30)(A)(iii)), regardless of the delivery medium.

Q: What if the company also performs services connected to the license?
A: Those service receipts are apportioned separately, to where the service is performed (Rules 3.546(e)(38), 3.557(e)(33)).

Q: Does it matter that the company is a Delaware LLC whose only Texas activity is selling these licenses?
A: The apportionment turns on where the license is used in Texas, not on the licensor's state of formation.

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. 3.546(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. 200212623L - same-day companion letter on data a company both gathers and analyzes (service vs license split)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200212624L

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. I apologize for the delay in getting back to
you on this matter.

You have indicated your client ("Company"), a Delaware LLC, was formed to
market seismic data. Company's only Texas activity is selling licenses for the
right to view seismic data. One of the members (Member #1) of Company
contributed the seismic data to Company upon formation in return for its
membership. Company licenses data that is previously collected, and Company
does not analyze or manipulate the data before providing it to customers.

Company sells a non-exclusive, non-transferable license to use the seismic
data. Member #2 has the exclusive right to market the data to customers and
enter into licensing agreements on behalf of Company. Company provides the
relevant information on magnetic tape or disc to customers.

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

Response:

The receipts Company receives from its customers for the licenses are
apportioned to Texas 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 Comptroller's
Rule Section 3.546(e)(30)(A)(iii). Any other services performed in connection
with the license shall be apportioned to the location where the service is
performed. See Rule Section 3.546(e)(38) and Rule Section 3.557(e)(33).

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