Was net gain from selling trademarks, goodwill, source code, patents, and other intangibles to a California corporation a Texas receipt?

Plain-English summary

Net gain from selling the listed capital-asset intangibles to a California corporation was not a Texas receipt because the former rules sourced the gain to the payor.

The transaction included a trademark, customer base, workforce in place, goodwill, source code, patents, and intellectual property. The buyer was a California corporation that planned to move the operations to California.

Rules 3.549(e)(3)(B) and 3.557(e)(3)(B) treated the assets as capital-asset intangibles. The net gain, not total sale proceeds, entered gross receipts and was apportioned to the location of the payor. Because the buyer was in California, the gain was not a Texas receipt.

The Comptroller distinguished a sale from ongoing use. Receipts attributed to the use of an intangible in Texas were Texas receipts to the extent of Texas use under Sections 171.103(4) and 171.1032(a)(4).

Currency note: This is a pre-2008 receipts-sourcing analysis. Texas replaced the former franchise tax with the margin tax effective January 1, 2008.

What this means for you

Businesses selling intellectual property

Under the former rules, classifying the assets as capital assets made net gain and payor location central to sourcing.

Businesses licensing or otherwise using intangibles

The letter expressly warns that use-based receipts follow where the intangible is used, a different rule from sale gain.

Common questions

Q: What amount entered gross receipts?
A: Net gain from the sale.

Q: Why was the gain non-Texas?
A: The payor was a California corporation.

Q: Did the same rule apply to licensing or use receipts?
A: No. Use receipts were Texas receipts to the extent of use in Texas.

Citations and references

• 34 Tex. Admin. Code Sec. 3.549(e)(3)(B)
• 34 Tex. Admin. Code Sec. 3.557(e)(3)(B)
• Texas Tax Code Secs. 171.103(4) and 171.1032(a)(4)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9907775L

Original ruling text

July 27, 1999

Dear **:

This is in response to your inquiry concerning a corporation's sale of certain
intangibles. You have stated that the corporation will receive consideration
for the following intangibles: trademark, customer base, workforce in place,
goodwill, source code, patents, and intellectual property. The purchasing
entity is a California corporation that will move the operations to California.

Based on the description in the letter ruling, we would characterize the
transaction as the sale of capital assets which are intangibles. Franchise Tax
Rules 3.549(e)(3)(B) and 3.557(e)(3)(B) address the apportionment of the gross
receipts resulting from the sale of intangibles held as capital assets for
taxable capital and earned surplus, respectively.

Under these rules, the net gain from the sale of the intangibles results in
gross receipts. The gross receipts from the net gain are apportioned to the
location of payor. Because the purchaser is a California corporation, the
gross receipts will not be apportioned to Texas.

We would note that any gross receipts of a corporation that are attributed to
the use of an intangible in Texas (as opposed to the sale of the intangible)
are apportioned as Texas receipts to the extent used in Texas. Please see
Sections 171.103(4) and 171.1032(a)(4) of the Texas Tax Code.

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

If you have any questions, please call toll-free 1-800-531-5441, extension
3-4496 or (512)463-4496.

Sincerely,

Jerry Bobbitt
Tax Policy Division