Where were royalty receipts from trademarks, franchises, and licenses sourced under the former Texas franchise tax?

Plain-English summary

Royalty revenue received by the intellectual-property owner was sourced to the payor's location.

A Texas-domiciled subsidiary held a nonexclusive right to sublicense intellectual property owned by its out-of-state parent. It paid a royalty to the parent and collected royalties from Texas-domiciled sublicensees.

Rule 3.549(e)(30)(A)(iii) expressly sourced an owner's trademark, franchise, and license revenues to the payor for the taxable-capital component.

The parallel earned-surplus amendment to Rule 3.557 had not yet been adopted. Even so, the Comptroller stated that the same payor-location method should apply to earned surplus in the meantime.

What this means for you

Intellectual-property licensors reviewing historical receipts

The owner's royalty receipts followed the commercial location of the payor under the rule described in the letter.

Tax professionals

Distinguish the adopted taxable-capital rule from the Comptroller's interim position while the earned-surplus amendment remained proposed.

Common questions

Q: How were the royalty receipts sourced for taxable capital?
A: To the payor's location.

Q: Did the same method apply to earned surplus?
A: Yes under the Comptroller's stated interim position.

Q: Had the earned-surplus rule amendment been adopted?
A: No, not when the letter was issued.

Citations and references

• 34 Tex. Admin. Code Sec. 3.549(e)(30)(A)(iii)
• Proposed amendment to 34 Tex. Admin. Code Sec. 3.557, as described in the letter

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9705429L

Original ruling text

May 14, 1997

Dear ***:

Thank you for your letter concerning the determination of Texas gross receipts.

Your client, DEF, Inc., ("DEF") is a Delaware corporation with its commercial
domicile in Texas. DEF is a wholly-owned subsidiary of XYZ, Inc. ("XYZ") a
Delaware corporation with a commercial domicile outside of Texas.

XYZ has granted DEF a nonexclusive right to sublicense certain intellectual
property owned by XYZ. DEF sublicenses this intellectual property to both
related and unrelated parties. DEF accrues a royalty expense for the use of
XYZ's intellectual property. The Sublicensees, in turn, pay a royalty to DEF
for the use of the intellectual property. The Sublicensees maintain commercial
domiciles in Texas, but are incorporated in various jurisdictions, including
Texas, Delaware, and other states.

Your specific question relates to a recent change in 34 TAC section 3.549,
concerning the method of apportioning revenues from trademarks, franchises and
licenses, which relates to the apportionment of the taxable capital component
of the franchise tax. You ask if this change will apply to the earned surplus
component of the tax as well since a similar change was not made to 34 TAC
section 3.557.

34 TAC section 3.549 subsection (e)(30)(A)(iii) states that "revenues received
by the owner of a trademark, franchise, and license are apportioned to the
location of payor." We have proposed a similar change to 34 TAC section 3.557,
but that rule has not yet been adopted. In the meantime, it is our position
that the revenues received by the owner of a trademark, franchise, and license
should be apportioned based on the location of payor for the earned surplus
component of the franchise tax.

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

If you have any questions about this or any other franchise tax matter, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612. You may
write me at Tax Policy Division, Comptroller of Public Accounts, Austin, Texas
78774.

Sincerely,

Janet Spies
Tax Policy Division