Single Business Tax Apportionment Sales Factor Excludes Royalty Income
In Kelly Services, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 303736, April 19, 2012, affirming the lower court, the Michigan Court of Appeals held that a taxpayer properly excluded royalty income from its sales factor and gross receipts calculations under the former single business tax for the tax years at issue. In the business of providing temporary staffing services, the taxpayer developed trademarks, trade names and know-how to create a common corporate identity and business procedures. The taxpayer received royalty income from licensing the trademarks, trade names and know-how to affiliated companies. The court considered whether the royalty income arose from the transfer of title or possession of the intangible property. No transfer of title occurred here. By definition, royalties are compensation paid to the owner of certain types of property for the use of that property. The royalty income arose from the transfer of the right to use the property, and not from the transfer of the possession of the property. Furthermore, the trademarks, trade names and know-how were not considered (1) stock in trade as they were not inventory, tools or equipment; (2) property of a kind that would be properly included in the taxpayer's inventory; or (3) property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business. The intangible property was licensed only to affiliated parties. Accordingly, the royalty income did not constitute sales, rental or lease receipts, and it did not constitute gross receipts.