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LEGAL RULING NO. 145

CALIFORNIA FRANCHISE TAX BOARD
Legal Ruling No. 145

June 27, 1958

ROYALTY INCOME: SOURCE

Royalty income received by a non-resident from an exclusive licensing agreement of a copyright item for use in California is not income from sources in this state.

Taxpayer, a nonresident of California, licensed X to conduct his copyrighted courses in a prescribed area of California. Although the contract appears to give X an exclusive right to conduct the classes in X's particular area, taxpayer retained the right to conduct certain other courses in said area, however it appears that this right was never exercised. Under the contract X agreed to pay a royalty of 12% of the gross proceeds of the course. Advice is requested as to whether the royalties are income from California sources.

As the taxpayer's courses are copyrighted, income received from the use of the copyright is royalty income. Under Regulation 17211-17214(b) royalties are taxable to a nonresident if the intangible producing the income has a taxable or business situs in this State, if not, such income is taxable at the domicile of the owner. Under said Regulation it seems apparent that despite the fact that a nonresident may conduct a trade or business in California, there must be a further "localization" of the intangible asset before it acquires a business situs within the State. The fact that X acquired an exclusive right to use the copyright in a given area does not "localize" the copyright to the extent of its use in that area. Hazeltine Corp. v McColgan, Sacramento Superior Court, Number 63171; Rainer Brewing Co. v McColgan, 94 CA2d 118. Nor does the taxpayer conduct a trade or business in California in such a manner as to give the income a source in this State. Under the circumstances the royalties received from X are not taxable under the Personal Income Tax Law as income from California sources.