Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2013
Sales and Use Tax Annotations
295.0000 GROSS RECEIPTS
295.0737 Transfer of Peptides—Collaboration Agreement. Taxpayer, a biotechnology company engaged in the research and development of peptides, entered into a collaboration agreement with another biotechnology company to develop new marketable products. Under the terms of the agreement, the taxpayer receives the right to use the company's existing products in taxpayer's research and development process. The company's technology is transferred to the taxpayer in tangible form (i.e., peptide libraries in vials) along with a written synopsis of each peptide's chemical structure. The company retains the ownership rights to the peptides and the taxpayer's use is restricted solely to research and development activities. Due to the physical characteristics of the technology, the peptides are destroyed during the taxpayer's activities.
For each peptide library provided for screening, the taxpayer pays the company a fixed amount for each library delivered. If the taxpayer's research efforts result in a "marketable" product, the collaboration agreement requires milestone payments and royalties. The nature of the product governs which party must pay the milestone and royalty amounts. If it is a therapeutic product, the taxpayer must pay the company; however, if a diagnostic product is developed, the company must pay the taxpayer.
In this case, the company is receiving consideration in the form of cash based on the transfer of peptide libraries. The transfer is not a lease since the libraries are destroyed in the course of the taxpayer's research and are not returned to the company. The fact that the agreement characterizes the transfer of the libraries as a "license" does not alter the treatment of the transfer under the Sales and Use Tax Law since possession of the libraries is not returned to the company. The remaining issue is what are the gross receipts from the company's sale of the libraries to the taxpayer.
Under the agreement, the taxpayer pays the company amounts for the libraries furnished to the taxpayer for screening. However, the taxpayer does not always make royalty payments to the company. Rather, where a "marketable" product is identified, the company may pay the taxpayer milestone and royalty fees, or the taxpayer may pay the company milestone and royalty fees, depending on whether the marketable product is therapeutic or diagnostic. Under the specific facts of this contract, the milestone and royalty payments are not regarded as to be from the company's sale of its peptide libraries. Thus, tax applies only to the company's charges for the sale of its peptide libraries. 5/10/95.