Tax Type
Retail Sales and Use Tax
Description
Photography; Royalty payments
Topic
Taxability of Persons and Transactions
Date Issued
01-08-1999
January 8, 1999
Re: Request for Ruling: Retail
Sales and Use Tax
Dear ****
This will reply to your letter in which you request a ruling as to the application of the retail sales and use tax to royalty payments made by * * * * * (the "Licensee'). I apologize for the delay in responding to your letter.
FACTS
The Licensee is in the business of developing, designing, manufacturing, and distributing board games and trading card games. The Licensee has entered into licensing agreements from various licensors for the intellectual property rights for the use of "**********' and "**********' characters, elements, designs, images and artwork to be incorporated into these games. The Licensee pays to the licensors a royalty payment based on a percentage of the net proceeds from the sale of the games, with a minimum amount guaranteed. Royalty payments are paid on a post-production basis only, i.e., royalty payments are only due when the licensed product is completed and shipped, and public awareness and goodwill have been generated. The Licensee is requesting a ruling on the application of the Virginia retail sales and use tax to royalty payments made to the licensors.
RULING
The term sale' is defined in Code of Virginia § 58.1-602 to mean " any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration. . . .'
The department has traditionally held that royalties paid by a licensee for not only the intellectual property rights but also for tangible personal property are analogous to leases of tangible personal property. Under this situation, the royalty payments are taxable. While the department's regulations do not expressly address the sales tax application to royalties, the department's policy with respect to this issue has been addressed in numerous rulings. [See e.g., P.D. 94-209 (7/6/94) enclosed.]
Based on the information provided, it appears that the terms of the license agreements in question are different. In one case, it is apparent that the terms of the license agreement include the intellectual property rights and also the provision of tangible personal property (still photographs, film footage, text, artwork, etc.). In accordance with the above, and provided the tangible personal property is being furnished to the Licensee by the licensor, such royalty payments would be subject to the tax.
The terms of the second license agreement appear to differ from the scenario set forth above. In this situation, the licensor is receiving royalties from the Licensee for the intellectual property rights to their property. The licensor does not provide any tangible personal property under the contract. Accordingly, the royalty payments to the licensor under this contract would not be subject to tax.
To summarize, if the contract between a licensor and Licensee includes the provision of tangible personal property to be furnished by the licensor, all royalty payments will be subject to the sales and use tax. If the contract provides to the Licensee the intellectual property rights, with no provision of tangible personal property by the licensor, the royalty payments will not be subject to the tax.
If you should have any questions concerning this ruling, please contact * * * * *, Office of Tax Policy, at * * * * *.
Danny M. Payne
Tax Commissioner
Re: Request for Ruling: Retail
Sales and Use Tax
Dear ****
This will reply to your letter in which you request a ruling as to the application of the retail sales and use tax to royalty payments made by * * * * * (the "Licensee'). I apologize for the delay in responding to your letter.
FACTS
The Licensee is in the business of developing, designing, manufacturing, and distributing board games and trading card games. The Licensee has entered into licensing agreements from various licensors for the intellectual property rights for the use of "**********' and "**********' characters, elements, designs, images and artwork to be incorporated into these games. The Licensee pays to the licensors a royalty payment based on a percentage of the net proceeds from the sale of the games, with a minimum amount guaranteed. Royalty payments are paid on a post-production basis only, i.e., royalty payments are only due when the licensed product is completed and shipped, and public awareness and goodwill have been generated. The Licensee is requesting a ruling on the application of the Virginia retail sales and use tax to royalty payments made to the licensors.
RULING
The term sale' is defined in Code of Virginia § 58.1-602 to mean " any transfer of title or possession, or both, exchange, barter, lease or rental, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property and any rendition of a taxable service for a consideration. . . .'
The department has traditionally held that royalties paid by a licensee for not only the intellectual property rights but also for tangible personal property are analogous to leases of tangible personal property. Under this situation, the royalty payments are taxable. While the department's regulations do not expressly address the sales tax application to royalties, the department's policy with respect to this issue has been addressed in numerous rulings. [See e.g., P.D. 94-209 (7/6/94) enclosed.]
Based on the information provided, it appears that the terms of the license agreements in question are different. In one case, it is apparent that the terms of the license agreement include the intellectual property rights and also the provision of tangible personal property (still photographs, film footage, text, artwork, etc.). In accordance with the above, and provided the tangible personal property is being furnished to the Licensee by the licensor, such royalty payments would be subject to the tax.
The terms of the second license agreement appear to differ from the scenario set forth above. In this situation, the licensor is receiving royalties from the Licensee for the intellectual property rights to their property. The licensor does not provide any tangible personal property under the contract. Accordingly, the royalty payments to the licensor under this contract would not be subject to tax.
To summarize, if the contract between a licensor and Licensee includes the provision of tangible personal property to be furnished by the licensor, all royalty payments will be subject to the sales and use tax. If the contract provides to the Licensee the intellectual property rights, with no provision of tangible personal property by the licensor, the royalty payments will not be subject to the tax.
If you should have any questions concerning this ruling, please contact * * * * *, Office of Tax Policy, at * * * * *.
Danny M. Payne
Tax Commissioner
Related Documents
Rulings of the Tax Commissioner