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

Tax Development Jun 29, 2011

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.

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.