Ryan Reports Texas Supreme Court Reverses Lower Courts on Sourcing of Receipts from Licensed Geophysical and Seismic Data

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Ryan, a leading global tax services firm with the largest indirect tax practice in North America, today reported that in TGS-NOPEC Geophysical Company v. Susan Combs, the Supreme Court of Texas (“Court”) decided that fees for licenses to access proprietary seismic data were receipts from the sale of intangibles (data) rather than receipts from the use of a license.

Ryan is a leading global tax services firm, with the largest indirect tax practice in North America and the seventh largest corporate tax practice in the United States.

Ryan, a leading global tax services firm with the largest indirect tax practice in North America, today reported that in TGS-NOPEC Geophysical Company v. Susan Combs, NO.08-1056 (TEX. MAY 27, 2011), the Supreme Court of Texas (“Court”) decided that fees for licenses to access proprietary seismic data were receipts from the sale of intangibles (data) rather than receipts from the use of a license.

According to Court record, the Texas Comptroller of Public Accounts (“Comptroller”) determined that receipts from licensing geophysical and seismic data to customers in Texas were receipts from the use of a license in Texas and were Texas receipts. TGS-NOPEC Geophysical Company (“TGS”) argued that its receipts were from sales of intangible assets.

For apportionment purposes, the Comptroller sources receipts from sales of intangibles, based on the payor’s state of domicile, and receipts from the use of an intangible patent, trademark, franchise, or license based on the location of use. Specifically, Tax Code § 171.103(a)(4) provides that receipts from the use of a patent, copyright, trademark, franchise, or license in Texas are Texas receipts.

By considering the statute as a whole and in context, the Court provided:

The term “license” in subsection (4) of the sourcing statute therefore refers to licenses that are themselves revenue-producing assets. It does not include the mechanism of licensing, which would subsume all intangible assets. Had that been the Legislature’s intent, it would not have been necessary to name the intangible assets specifically as the Legislature has done in subsection (4).

In deciding for this case, the Court pointed out that the Comptroller’s construction of the statute is inconsistent with her rule regarding the licensing of software. Subsection (e)(3) of 34 TAC § 3.591 allocates receipts from licensing software to the location of the payor as sales of intangibles. Because software is transferred by licensing, the Comptroller’s argument should have required that receipts from software licenses be allocated based on the use of the software.

The Court found that because TGS owns the data, not the licenses, receipts from its customers’ use of the data should be sourced under Tax Code § 171.103(a) (6) to the location of the payor.

About Ryan
Ryan is a leading global tax services firm, with the largest indirect tax practice in North America and the seventh largest corporate tax practice in the United States. Headquartered in Dallas, Texas, the Firm provides a comprehensive range of state, local, federal, and international tax advisory and consulting services on a multi-jurisdictional basis, including audit defense, tax recovery, credits and incentives, tax process improvement and automation, tax appeals, tax compliance, and strategic planning. In 2010, Ryan received the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the award-winning myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan’s multi-disciplinary team of more than 900 professionals and associates serves many of the world’s most prominent Fortune 1000 companies. More information about Ryan can be found at http://www.ryan.com.

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Jim Aubele
Ryan
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