ISSUE: Under what circumstances will the in-state ownership and use of intangible property subject a foreign corporation to the corporate excise?

DIRECTIVE: A foreign corporation's intangible property used within Massachusetts will subject that corporation to the corporate excise where:

(1) The intangible property generates, or is otherwise a source of, gross receipts within the state for the corporation, including through a license or franchise; and

(2) The activity through which the corporation obtains such gross receipts from its intangible property is purposeful (e.g., a contract with an in-state company); and

(3) The corporation's presence within the state, as indicated by its intangible property and its activities with respect to that property, is more than de minimis.

EXPLANATION: Under G.L. c. 63, § 39, a foreign corporation is subject to the corporate excise when, inter alia, it does business in Massachusetts, or owns or uses any part or all of its capital, plant or any other property in the state. The Commissioner construes this provision to the full extent permitted by the Constitution and laws of the United States.

The definition of intangible property generally includes, but is not limited to, copyrights, patents, trademarks, trade names, trade secrets, service marks and know-how. However, for purposes of this directive, the Commissioner will treat the license of canned software, transferred on a tangible medium, to be used for any purpose other than commercial reproduction, as the sale of tangible personal property, not the license of intangible property. A foreign corporation whose in-state activity is described in G.L. c. 63, § 39 is not subject to the Massachusetts corporate excise if such in-state activity is within the confines of in Public Law 86-272 (i.e., 15 U.S.C. §§ 381 et seq.). Public Law 86-272 precludes the imposition of a corporate tax measured by net income where a foreign corporation's sole activity in Massachusetts is the solicitation of the sale of tangible personal property, provided certain conditions are met. For example, Public Law 86-272 could potentially apply to a foreign corporation's solicitation of sales in Massachusetts of tangible personal property which contains intangible property (such as books, recordings, or canned software). In contrast, the focus of this directive are the transactions where a foreign corporation derives gross receipts from intangible property which is licensed or otherwise transferred for continuing commercial exploitation in the state. These latter transactions are not protected by Public Law 86-272.

EXAMPLES: The following examples illustrate the application of this directive. In Examples 1-3, it is presumed that the foreign corporation's presence in Massachusetts, as indicated by its intangible property and its activities with respect to that property, is more than de minimis. Moreover, in Examples 1-3 it is presumed that the foreign corporation does not otherwise transact business with respect to, or own property in, the state.

EXAMPLE 1. Dress Shop, a Delaware corporation located in Wisconsin, manufactures and sells girls' clothing under the name Tinker Bell. In Year 1, Dress Shop licenses the name Tinker Bell to Girl Towne, a Massachusetts company, for use in connection with the sale of clothing produced by Girl Towne in Massachusetts. Pursuant to the contract entered into between Dress Shop and Girl Towne, Girl Towne is to pay Dress Shop a royalty of 2% on the sale of every item of clothing sold under the Tinker Bell name. Girl Towne makes sales under the Tinker Bell name in Massachusetts during Year 1 and makes the corresponding royalty payments to Dress Shop, as required. Dress Shop has nexus with Massachusetts in Year 1.

EXAMPLE 2. Motor Way, a Delaware corporation located in Alabama, develops the technology for a new low-weight motor scooter and patents this technology. In Year 2, Motor Way licenses its patented technology to Speed Rider, a Massachusetts company, for use in connection with the manufacture and sale of scooters in Massachusetts. Pursuant to the contract entered into between Motor Way and Speed Rider, Speed Rider is to pay Motor Way an upfront fee for the right to make use of Motor Way's patented technology, and a royalty of 4% on the sale of every scooter which Speed Rider manufactures and sells using this technology. Speed Rider manufactures scooters using the Motor Way technology in Year 2, and sells these scooters in Massachusetts during that same year. In addition, Speed Rider makes the corresponding royalty payments to Motor Way for Year 2, as required. Motor Way has nexus with Massachusetts in Year 2.

EXAMPLE 3. Ginzu Ltd. is a fast food franchiser, incorporated in Delaware and located in New Jersey. In Year 3, Ginzu Ltd. franchises the rights to one of its "Ginzu Gardens" fast food restaurants to a franchisee, John Cook, a New Hampshire resident, for a location which is specified to be in Massachusetts. The terms of the franchise agreement both permit and require Mr. Cook to use the various items of intangible property owned by Ginzu Ltd. (e.g., the name "Ginzu Gardens," certain service marks, a patented food process, trade secrets, and know-how). In addition, the terms of the franchise agreement require Mr. Cook to pay Ginzu Ltd. a monthly franchise fee, as well as a royalty charge of 6% of the sales proceeds received by the Massachusetts' restaurant, Ginzu Gardens. Mr. Cook makes such payments to Ginzu Ltd. during Year 3, as required. Ginzu Ltd. has nexus with Massachusetts in Year 3.

EXAMPLE 4: Golf Time is a corporation, incorporated in South Carolina and located in that same state. Golf Time is the creator of "cold day" golf clubs. "Cold day" golf clubs have grips that emit warmth when squeezed, since they are specially treated with Golf Time's "heat-grip" technology. Golf Time has patented its "heat grip" technology, and obtained registered trademarks for each of the terms "cold day" and "heat-grip." Golf Time solicits sales of its "cold day" golf clubs in Massachusetts, touting the merits of its "heat grip" technology. Golf Time's activities result in significant sales of "cold day" golf clubs in Massachusetts. Golf Time engages in no other business activity with respect to Massachusetts. Assuming Golf Time's Massachusetts activities are protected by Public Law 86-272, Golf Time will not be subject to the corporate excise for the years in question.

EFFECTIVE DATE : The principles set forth in this directive will apply to taxable years beginning on or after January 1, 1996.

/s/Frederick A. Laskey
Frederick A. Laskey
Senior Deputy Commissioner

MA:HMP:mtf

July 3, 1996

DD 96-2