Were royalty receipts taxable when a developer licensed toy and game concepts for others to mass-produce, market, and sell?

Plain-English summary

The business developed toys and games, sometimes creating working models, boards, pieces, rules, stuffed toys, storybooks, artwork, and photographs. Manufacturers paid royalties when they bought and produced the ideas.

After reviewing example contracts, the Comptroller concluded that the business sold a concept or idea for an end product rather than tangible personal property. Its work was analogous to an inventor or research-and-development operation creating concepts for others to mass-produce, market, and sell.

No sales tax was due on royalty receipts. The developer paid tax on all materials used or consumed in the licensing operation.

Common questions

Were the royalties taxable? No.

Was the business selling tangible personal property? No under the reviewed contracts.

Who paid tax on prototype and development materials? The developer.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8605L0801A01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
Comptroller May 16, 1986

Dear ****:

Thank you for submitting some example contracts for our review.

We have decided, after reviewing the contracts, that you are not selling
tangible personal property, but a concept or idea for an end product.
Your activities are analogous to an inventor or research and development
operation. You "create" a concept for someone else to mass produce,
market and sell.

You are required to pay tax on all materials used or consumed in your
"licensing" operation.

No sales tax is due on your "royalty" receipts.

This opinion is based on the facts presented. If there are additional
or
different facts, the opinion may change.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
F. Wayne McDonald
Tax Policy Section
Tax Administration Division

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, TX 78774

BOB BULLOCK
Comptroller April 23, 1986

Dear ****:

Thank you for your letter concerning your business activities and the
cancellation of your sales tax permit.

You indicated to me in our telephone conversation on April 18, 1986 that
you
deal in the development of toys and games. Sometimes you develop a game
which will entail designing a game board, pieces and rules for the game;
an
actual working model. Other times you will develop a stuffed toy and
along
with it a story book. You will produce an actual stuffed toy and story
book
with art work, photos and cover. If a manufacturer purchases your idea
and goes into production, you are paid on a royalty basis.

I have discussed your situation with our policy committee and they feel
we
need additional information before a decision can be reached.

We would like to see copies of any contracts or agreements you have
entered
into with any manufactures and/or agents purchasing your services in
these
areas.

Also, if you feel any description of what you do is not representative,
please
so state.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
F. Wayne McDonald
Tax Policy Section
Tax Administration Division