TGS-NOPEC Victory in Franchise Tax Case has Broad Implications for Texas Businesses

by Jackson Walker
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On May 27, 2011, The Texas Supreme Court found in favor of TGS-NOPEC Geophysical Company in a dispute involving how TGS' receipts from the licensing of its geophysical data should be apportioned for Texas franchise tax purposes. This long-awaited decision has far-reaching effects not only for the seismic and geophysical data industry but for other industries that grant licenses in intangible assets not otherwise apportioned in the sourcing statute.

The dispute involved how TGS' receipts from licensing its data should be sourced under the Texas Tax Code. The sourcing statute provides that a corporation's gross receipts from business done in Texas includes "the corporation's receipts from . . . the use of a patent, copyright, trademark, franchise, or license in this state . . ." § 171.103(a)(4). TGS argued that the revenue from its geophysical data should have been characterized as receipts from the license or sale of an intangible asset rather than from the use of a license, and thus should be considered "other business done in this State," which is properly sourced to the company's legal domicile.

TGS argued that the word "license" must be read in the context of the whole statute and that consideration must be given to what it means to "use a license." The Comptroller asserted that because TGS employed license agreements to complete its sale of data in Texas the revenue was derived from the use of a license and should have been sourced to Texas. The Court rejected the Comptroller's interpretation, finding it inconsistent with the language of the statute itself, its own administrative rule and the treatment of other types of intangible assets.

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