Colo. Code Regs. 39-22-303.6-11

Current through Register Vol. 47, No. 23, December 10, 2024

Rule 39-22-303.6-11 - License or Lease of Intangible Property

Basis and Purpose. The bases of this rule are §§ 39-21-112, 39-22-301, 39-22-303, and 39-22-303.6, C.R.S. The purpose of this rule is to provide guidance for determining which gross receipts from the license or lease of intangible property are included in a taxpayer's receipts factor. Consistent with the General Assembly's adoption of § 39-22-303.6, C.R.S., these rules are intended to conform the state's income tax laws to the Multistate Tax Commission's model statute and regulation except when those model provisions are inconsistent with Colorado statute. See 2018 Colo. Sess. Laws, ch. 369, § 1(2).

(1)General Rules.

(a) The receipts from the license of intangible property are in Colorado if and to the extent the intangible is used in Colorado. In general, the term "use" is construed to refer to the location of the taxpayer's market for the use of the intangible property that is being licensed and is not to be construed to refer to the location of the property or payroll of the taxpayer. The rules that apply in determining the location of the use of intangible property in the context of several specific types of licensing transactions are set forth in paragraphs (2) through (5) of this rule. For purposes of the rules set forth in this Rule 39-22-303.6 -11, a lease of intangible property is to be treated the same as a license of intangible property.

(b) In general, a license of intangible property that conveys all substantial rights in that property is treated as a sale of intangible property for purposes of Rules 39-22-303.6 -7 through-13. See Rule 39-22-303.6 -12. Note, however, that for purposes of Rules 39-22-303.6 -11 and-12, a sale or exchange of intangible property is treated as a license of that property where the receipts from the sale or exchange derive from payments that are contingent on the productivity, use, or disposition of the property.

(c) Intangible property licensed as part of the sale or lease of tangible property is treated under Rules 39-22-303.6 -7 through-13 as the sale or lease of tangible property.

(d) Nothing in this Rule 39-22-303.6 -11 shall be construed to allow or require the inclusion of receipts in the receipts factor that are not included in the definition of "receipts" pursuant to § 39-22-303.6(1)(d), C.R.S., or related rules, or that are excluded from the numerator and the denominator of the receipts factor pursuant to § 39-22-303.6(6)(d)(III), C.R.S. For examples of the types of intangibles that are excluded pursuant to § 39-22-303.6(1)(d), C.R.S., see paragraphs (1)(i), (1)(l)(vi), and (1)(l)(vii) of Rule 39-22-303.6 -1. For examples of the types of intangibles that are excluded pursuant to § 39-22-303.6(6)(d)(III), C.R.S., see paragraph (1)(d) of Rule 39-22-303.6 -12. To the extent that the transfer of either a security, as defined in paragraph (1)(n) of Rule 39-22-303.6 -1, or business "goodwill" or similar intangible value, including, without limitation, "going concern value" or "workforce in place," may be characterized as a license or lease of intangible property, receipts from such transaction shall be excluded from the numerator and the denominator of the taxpayer's receipts factor.

(2)License of a Marketing Intangible. Where a license is granted for the right to use intangible property in connection with the sale, lease, license, or other marketing of goods, services, or other items (a "marketing intangible") to a consumer, the royalties or other licensing fees paid by the licensee for that marketing intangible are assigned to Colorado to the extent that those fees are attributable to the sale or other provision of goods, services, or other items purchased or otherwise acquired by consumers or other ultimate customers in Colorado.

(a) Examples of a license of a marketing intangible include, without limitation, the license of a service mark, trademark, or trade name; certain copyrights; the license of a film, television, or multimedia production, or event for commercial distribution; and a franchise agreement. In each of these instances the license of the marketing intangible is intended to promote consumer sales.

(b) In the case of the license of a marketing intangible, where a taxpayer has actual evidence of the amount or proportion of its receipts that is attributable to Colorado, it shall assign that amount or proportion to Colorado. In the absence of actual evidence of the amount or proportion of the licensee's receipts that are derived from Colorado consumers, the portion of the licensing fee to be assigned to Colorado must be reasonably approximated by multiplying the total fee by a percentage that reflects the ratio of the Colorado population in the specific geographic area in which the licensee makes material use of the intangible property to regularly market its goods, services, or other items relative to the total population in that area. If the license of a marketing intangible is for the right to use the intangible property in connection with sales or other transfers at wholesale rather than directly to retail customers, the portion of the licensing fee to be assigned to Colorado must be reasonably approximated by multiplying the total fee by a percentage that reflects the ratio of the Colorado population in the specific geographic area in which the licensee's goods, services, or other items are ultimately and materially marketed using the intangible property relative to the total population of that area. Unless the taxpayer demonstrates that the marketing intangible is materially used in the marketing of items outside the United States, the fees from licensing that marketing intangible will be presumed to be derived from within the United States.

(3)License of a Production Intangible. If a license is granted for the right to use intangible property other than in connection with the sale, lease, license, or other marketing of goods, services, or other items, and the license is to be used in a production capacity (a "production intangible"), the licensing fees paid by the licensee for that right are assigned to Colorado to the extent that the use for which the fees are paid takes place in Colorado.

(a) Examples of a license of a production intangible include, without limitation, the license of a patent, a copyright, or trade secrets to be used in a manufacturing process, where the value of the intangible lies predominately in its use in that process.

(b) In the case of a license of a production intangible to a party, other than a related party where the location of actual use is unknown, it is presumed that the use of the intangible property takes place in the state of the licensee's commercial domicile (where the licensee is a business) or the licensee's state of primary residence (where the licensee is an individual). If the Department can reasonably establish that the actual use of intangible property pursuant to a license of a production intangible takes place in part in Colorado, it is presumed that the entire use is in Colorado except to the extent that the taxpayer can demonstrate that the actual location of a portion of the use takes place outside Colorado. In the case of a license of a production intangible to a related party, the taxpayer must assign the receipts to where the intangible property is actually used.

(4)License of a Mixed Intangible. If a license of intangible property includes both a license of a marketing intangible and a license of a production intangible (a "mixed intangible") and the fees to be paid in each instance are separately and reasonably stated in the licensing contract, the Department will accept that separate statement for purposes of Rules 39-22-303.6 -7 through- 13. If a license of intangible property includes both a license of a marketing intangible and a license of a production intangible and the fees to be paid in each instance are not separately and reasonably stated in the contract, it is presumed that the licensing fees are paid entirely for the license of the marketing intangible except to the extent that the taxpayer or the Department can reasonably establish otherwise.

(5)License of Intangible Property where the Substance of the Transaction Resembles a Sale of Goods or Services.

(a)In General. In some cases, the license of intangible property will resemble the sale of an electronically delivered good or service rather than the license of a marketing intangible or a production intangible. In these cases, the receipts from the licensing transaction are assigned by applying the rules set forth in paragraphs (3)(b)(ii) and (iii) of Rule 39-22-303.6 -10, as if the transaction were a service delivered to an individual or business customer or delivered electronically through an individual or business customer, as applicable. Examples of transactions to be assigned under this paragraph (5) include, without limitation, the license of database access, the license of access to information, the license of digital goods (see paragraph (2) of Rule 39-22-303.6 -13), and the license of certain software (e.g., where the transaction is not the license of pre-written software that is treated as the sale of tangible personal property see paragraph (1) of Rule 39-22-303.6 -13).

(b)Sublicenses. Pursuant to paragraph (5)(a), the rules of paragraph (3)(b)(iii) of Rule 39-22-303.6 -10 may apply where a taxpayer licenses intangible property to a customer that, in turn, sublicenses the intangible property to end users as if the transaction were a service delivered electronically through a customer to end users. In particular, the rules set forth at paragraph (3)(b)(iii) of Rule 39-22-303.6 -10 that apply to services delivered electronically to a customer for purposes of resale and subsequent electronic delivery in substantially identical form to end users or other recipients may also apply with respect to licenses of intangible property for purposes of sublicense to end users. For this purpose, the intangible property sublicensed to an end user shall not fail to be substantially identical to the property that was licensed to the sublicensor merely because the sublicense transfers a reduced bundle of rights with respect to that property (e.g., because the sublicensee's rights are limited to its own use of the property and do not include the ability to grant a further sublicense), or because that property is bundled with additional services or items of property.

(6)Examples. In these examples, unless otherwise stated, assume that the customer is not a related party.

(a)Example (i). Crayon Corp and Dealer Co enter into a license contract under which Dealer Co, as licensee, is permitted to use trademarks that are owned by Crayon Corp in connection with Dealer Co's sale of certain products to retail customers. Under the contract, Dealer Co is required to pay Crayon Corp a licensing fee that is a fixed percentage of the total volume of monthly sales made by Dealer Co of products using the Crayon Corp trademarks. Under the contract, Dealer Co is permitted to sell the products at multiple store locations, including store locations that are both within and without Colorado. Further, the licensing fees that are paid by Dealer Co are broken out on a per-store basis. The licensing fees paid to Crayon Corp by Dealer Co represent fees from the license of a marketing intangible. The portion of the fees to be assigned to Colorado are determined by multiplying the fees by a percentage that reflects the ratio of Dealer Co's receipts that are derived from its Colorado stores relative to Dealer Co's total receipts. See paragraph (2).

(b)Example (ii). Program Corp, a corporation based outside Colorado, licenses programming that it owns to licensees, such as cable networks, that, in turn, will offer the programming to their customers on television or other media outlets in Colorado and in all other U.S. states. Each of these licensing contracts constitutes the license of a marketing intangible. For each licensee, assuming that Program Corp lacks evidence of the actual number of viewers of the programming in Colorado, the component of the licensing fee paid to Program Corp by the licensee that constitutes Program Corp's Colorado receipts is determined by multiplying the amount of the licensing fee by a percentage that reflects the ratio of the Colorado audience of the licensee for the programming relative to the licensee's total U.S. audience for the programming. See paragraph (5). Note that the analysis and result as to the state or states to which receipts are properly assigned would be the same to the extent that the substance of Program Corp's licensing transactions may be determined to resemble a sale of goods or services, instead of the license of a marketing intangible. See paragraph (5).

(c)Example (iii). Moniker Corp enters into a license contract with Wholesale Co. Pursuant to the contract, Wholesale Co is granted the right to use trademarks owned by Moniker Corp to brand sports equipment that is to be manufactured by Wholesale Co or an unrelated entity and to sell the manufactured equipment to unrelated companies that will ultimately market the equipment to consumers in a specific geographic region, including a foreign country. The license agreement confers a license of a marketing intangible, even though the trademarks in question will be affixed to property to be manufactured. In addition, the license of the marketing intangible is for the right to use the intangible property in connection with sales to be made at wholesale rather than directly to retail customers. The component of the licensing fee that constitutes the Colorado receipts of Moniker Corp is determined by multiplying the amount of the fee by a percentage that reflects the ratio of the Colorado population in the specific geographic region relative to the total population in that region. See paragraph (2). If Moniker Corp is able to reasonably establish that the marketing intangible was materially used throughout a foreign country, then the population of that country will be included in the population ratio calculation. However, if Moniker Corp is unable to reasonably establish that the marketing intangible was materially used in the foreign country in areas outside a particular major city; then none of the foreign country's population beyond the population of the major city is included in the population ratio calculation.

(d)Example (iv). Formula, Inc and Appliance Co enter into a license contract under which Appliance Co is permitted to use a patent owned by Formula, Inc to manufacture appliances. The license contract specifies that Appliance Co is to pay Formula, Inc a royalty that is a fixed percentage of the gross receipts from the products that are later sold. The contract does not specify any other fees. The appliances are both manufactured and sold in Colorado and several other states. Assume the licensing fees are paid for the license of a production intangible, even though the royalty is to be paid based upon the sales of a manufactured product (i.e., the license is not one that includes a marketing intangible). Because the Department can reasonably establish that the actual use of the intangible property takes place, in part, in Colorado, the royalty is assigned based to the location of that use rather than to the location of the licensee's commercial domicile in accordance with paragraph (1). It is presumed that the entire use is in Colorado except to the extent that the taxpayer can demonstrate that the actual location of some or all of the use takes place outside Colorado. Assuming that Formula, Inc can demonstrate the percentage of manufacturing that takes place in Colorado using the patent relative to the manufacturing in other states, that percentage of the total licensing fee paid to Formula, Inc under the contract will constitute Formula, Inc's Colorado receipts. See paragraph (5).

(e)Example (v). Axle Corp enters into a license agreement with Biker Co in which Biker Co is granted the right to produce motor scooters using patented technology owned by Axle Corp and also to sell the scooters by marketing the fact that the scooters were manufactured using the special technology. The contract is a license of both a marketing and production intangible, i.e., a mixed intangible. The scooters are manufactured outside Colorado. Assume that Axle Corp lacks actual information regarding the proportion of Biker Co's receipts that are derived from Colorado customers. Also assume that Biker Co is granted the right to sell the scooters in a U.S. geographic region in which the Colorado population constitutes 25% of the total population during the period in question. The licensing contract requires an upfront licensing fee to be paid by Biker Co to Axle Corp and does not specify what percentage of the fee derives from Biker Co's right to use Axle Corp's patented technology. Because the fees for the license of the marketing and production intangible are not separately and reasonably stated in the contract, it is presumed that the licensing fees are paid entirely for the license of a marketing intangible, unless either the taxpayer or the Department reasonably establish otherwise. Assuming that neither party establishes otherwise, 25% of the licensing fee constitutes Colorado receipts. See paragraphs (2) and (4).

(f)Example (vi). Same facts as Example (v), except that the license contract specifies separate fees to be paid for the right to produce the motor scooters and for the right to sell the scooters by marketing the fact that the scooters were manufactured using the special technology. The licensing contract constitutes both the license of a marketing intangible and the license of a production intangible. Assuming that the separately stated fees are reasonable, the Department will:

(1) assign no part of the licensing fee paid for the production intangible to Colorado, and

(2) assign 25% of the licensing fee paid for the marketing intangible to Colorado. See paragraph (4).

(g)Example (vii). Better Burger Corp, which is based outside Colorado, enters into franchise contracts with franchisees that agree to operate Better Burger restaurants as franchisees in various states. Several of the Better Burger Corp franchises are in Colorado. In each case, the franchise contract between the individual and Better Burger provides that the franchisee is to pay Better Burger Corp an upfront fee for the receipt of the franchise and monthly franchise fees, which cover, among other things, the right to use the Better Burger name and service marks, food processes and cooking know-how, as well as fees for management services. The upfront fees for the receipt of the Colorado franchises constitute fees paid for the licensing of a marketing intangible. These fees constitute Colorado receipts because the franchises are for the right to make Colorado sales. The monthly franchise fees paid by Colorado franchisees constitute fees paid for (1) the license of marketing intangibles (the Better Burger name and service marks), (2) the license of production intangibles (food processes and know-how) and (3) personal services (management fees). The fees paid for the license of the marketing intangibles and the production intangibles constitute Colorado receipts because in each case the use of the intangibles is to take place in Colorado. See paragraphs (2) and (3). The fees paid for the personal services are to be assigned pursuant to Rule 39-22-303.6 -10.

(h)Example (viii). Online Corp, a corporation based outside Colorado, licenses an information database through the Internet to individual customers who are resident in Colorado and in other states. These customers access Online Corp's information database primarily in their states of residence, and sometimes, while traveling, in other states. The license is a license of intangible property that resembles a sale of goods or services and are assigned in accordance with paragraph (5). If Online Corp can determine or reasonably approximate the state or states from which its database is accessed, it must do so. Assuming that Online Corp cannot determine or reasonably approximate the location from which its database is accessed, Online Corp must assign the receipts made to the individual customers using the customers' billing addresses to the extent known. Assume for purposes of this example that Online Corp knows the billing address for each of its customers. In this case, Online Corp's receipts from sales made to its individual customers are in Colorado in any case in which the customer's billing address is in Colorado. See paragraph (3)(b)(ii)(A) of Rule 39-22-303.6 -10.

(i)Example (ix). Net Corp, a corporation based outside Colorado, licenses an information database through the Internet to a business customer, Business Corp, a company with offices in Colorado and two neighboring states. The license is a license of intangible property that resembles a sale of goods or services and are assigned in accordance with paragraph (5). Assume that Net Corp cannot determine the location from which its database is accessed but reasonably approximates that 75% of Business Corp's database access took place in Colorado, and 25% of Business Corp's database access took place in other states. In that case, 75% of the receipts from database access is in Colorado. Assume alternatively that Net Corp lacks sufficient information regarding the location from which its database is accessed to reasonably approximate the location. Under these circumstances, if Net Corp derives 5% or less of its receipts from database access from Business Corp, Net Corp must assign the receipts under paragraph (3)(b)(ii)(B) of Rule 39-22-303.6 -10 to the state from which Business Corp principally managed the contract, or if that state is not reasonably determinable, to the state where Business Corp placed the order for the services, or if that state is not reasonably determinable, to the state of Business Corp's billing address. If Net Corp derives more than 5% of its receipts from database access from Business Corp, Net Corp is required to identify the state in which its contract of sale is principally managed by Business Corp and must assign the receipts to that state. See paragraph (3)(b)(ii)(B) of Rule 39-22-303.6 -10

(j)Example (x). Net Corp, a corporation based outside Colorado, licenses an information database through the Internet to more than 250 individual and business customers in Colorado and in other states. The license is a license of intangible property that resembles a sale of goods or services and receipts from that license are assigned in accordance with paragraph (5). Assume that Net Corp cannot determine or reasonably approximate the location where its information database is accessed. Also assume that Net Corp does not derive more than 5% of its receipts from sales of database access from any single customer. Net Corp may apply the safe harbor stated in paragraph (3)(b)(ii)(B)(IV) of Rule 39-22-303.6 -10 and may assign its receipts to a state or states using each customer's billing address.

(k)Example (xi). Web Corp, a corporation based outside of Colorado, licenses an Internet-based information database to business customers that then sublicense the database to individual end users that are resident in Colorado and in other states. These end users access Web Corp's information database primarily in their states of residence, and sometimes, while traveling, in other states. Web Corp's license of the database to its customers includes the right to sublicense the database to end users, but the sublicenses provide that the rights to access and use the database are limited to the end users' own use and prohibit the individual end users from further sublicensing the database. Web Corp receives a fee from each customer based upon the number of sublicenses issued to end users. The license is a license of intangible property that resembles a sale of goods or services and are assigned by applying the rules set forth in paragraph (3)(b)(iii) of Rule 39-22-303.6 -10. See paragraph (5). If Web Corp can determine or reasonably approximate the state or states from which its database is accessed by end users, it must do so. Assuming that Web Corp lacks sufficient information from which it can determine or reasonably approximate the location from which its database is accessed by end users, Web Corp must approximate the extent to which its database is accessed from Colorado using a percentage that represents the ratio of the Colorado population in the specific geographic area in which Web Corp's customer sublicenses the database access relative to the total population in that area. See paragraph (3)(b)(iii)(C) of Rule 39-22-303.6 -10.

39-22-303.6-11

Colorado Register, Vol 37, No. 14. July 25, 2014, effective 8/14/2014

37 CR 18, September 25, 2014, effective 10/15/2014

37 CR 19, October 10,2014, effective 10/30/2014

37 CR 22, November 25, 2014, effective 12/16/2014

38 CR 04, February 25, 2015, effective 3/17/2015

38 CR 07, April 10, 2015, effective 4/30/2015

38 CR 11, June 10, 2015, effective 6/30/2015

38 CR 22, November 25, 2015, effective 12/15/2015

38 CR 24, December 25, 2015, effective 1/14/2016

38 CR 24, December 25, 2015, effective 1/19/2016

39 CR 01, January 10, 2016, effective 1/30/2016

39 CR 16, August 25, 2016, effective 9/14/2016

40 CR 08, April 25, 2017, effective 5/15/2017

40 CR 12, June 25, 2017, effective 7/15/2017

40 CR 16, August 25, 2017, effective 9/14/2017

40 CR 23, December 10, 2017, effective 1/1/2018

41 CR 14, July 25, 2018, effective 8/14/2018

41 CR 20, October 25, 2018, effective 11/14/2018

42 CR 02, January 25, 2019, effective 12/18/2018

42 CR 02, January 25, 2019, effective 12/18/2018, expires 4/17/2019

42 CR 06, March 25, 2019, effective 4/14/2019

43 CR 04, February 25, 2020, effective 3/16/2020

43 CR 13, July 10, 2020, effective 6/2/2020

43 CR 17, September 10, 2020, effective 9/30/2020

44 CR 03, February 10, 2021, effective 3/2/2021

44 CR 07, April 10, 2021, effective 4/30/2021

44 CR 08, April 25, 2021, effective 5/15/2021

45 CR 01, January 10, 2022, effective 1/30/2022

45 CR 04, February 25, 2022, effective 3/17/2022

45 CR 05, March 10, 2022, effective 3/30/2022

46 CR 11, June 10, 2023, effective 5/2/2023

46 CR 09, May 10, 2023, effective 5/30/2023