Problem
Your client is a Delaware corporation with its principal place of business in Texas. The client gathers, interprets, and markets seismic and geophysical data regarding subsurface terrains worldwide with sophisticated seismic equipment and software technology. It stores this data in a master library and licenses various parts of the library to customers who then use the licensed data to evaluate oil and gas formations for drilling operations. The customers are required to enter into a master license agreement (agreement) with your client , which governs the parties' rights and obligations. The agreement describes your client 's seismic data as proprietary information and as valuable and highly confidential trade secrets. The agreement also states that your client retains title to the seismic data and that it only licenses the limited use of the information to its customers.
When a customer wants to access data for a particular location, your client and the customer enter into a specific license agreement under the master license agreement. Your client generally charges its customers a flat fee to access data under these specific license agreements and does not receive any additional payments, such as royalties. The data is then delivered to its customers in tangible media forms such as magnetic tapes, printed materials, or film. The licensing agreements are nonexclusive, and your client may license the same data to multiple customers. Its customers receive unlimited access to the data under the specific license purchased, but cannot disseminate the information to third parties or transfer the license.
Your client maintains that the revenue it earned as the owner and licensor of seismic data should be characterized as receipts derived from the sale of an intangible asset and, as such, allocated to the state of the payor's domicile. Your client 's revenue is obtained from the use of the seismic data by its clients. Your client owns the seismic data, which is its intellectual property. The customers are granted a right to access the data through license agreements.
You may assume that 60% of the clients who use the seismic date are located outside Texas. The remaining 40% of the users have a place of business in Texas.
You may assume that your client is not the owner of the license but the owner of the data. Therefore, its receipts from customers, who use its seismic data, are paying for the limited sale of an intangible. Under Rule 3.549(e)(30)(A)(iii) and Texas Tax Code Sec. 171.103(a)(6) proceeds from the sale of an intangible are allocated under the "location of the payor" rule.
How does your client source the revenue received for use of the seismic data base?