Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 295.0557


295.0557 Royalty Payments. A taxpayer sells equipment used in a manufacturing process. The equipment is supplied by a manufacturer who holds the patent on the equipment. After the sale of the equipment by the taxpayer, the manufacturer enters into a separate license agreement with the purchaser. Pursuant to that agreement, quarterly royalty payments for the use of the equipment are paid by the purchaser to the manufacturer. The taxpayer collects the royalty payments on behalf of the manufacturer and is compensated for the collection work by retaining 15% of the royalty payment as a commission.

Royalty payments received in connection with a retail sale of the patented equipment are included in retailer's gross receipts. In this case, the purchaser could not use the equipment without paying royalties to the manufacturer who holds the patent on the equipment. Under such circumstances, sales tax is measured by the total amount of the sales price of the equipment, including 100 percent of the royalties paid by the purchaser of which 15 percent is retained by the taxpayer. As the retailer of the equipment, the taxpayer must report the royalty payments in the quarter in which the payment becomes due. 6/20/96.