Royalties Paid for Intellectual Property Exempt in Pennsylvania

Royalties and licensing fees paid for intellectual property used in operating video game machines in a casino resort were determined to be exempt from Pennsylvania sales and use tax. The intellectual property was in the form of trademarks, copyrights, and patented methods of play owned by third parties. The taxpayer executed separate agreements for the use of the software in the gaming machines and the use of the intellectual property. The royalty fee charges were incurred on a daily basis, separately from the initial purchases of the gaming machines, the operating software, and the software licenses. In addition, the intellectual property was not necessary for the gaming machines to function, but the taxpayer was required to purchase it to obtain the right to engage particular poker styles or games. Also, the taxpayer’s decisions about which intellectual property to purchase depended upon events occurring after the machines and software were already in place and being used. The royalties did not involve nor were they ancillary to the purchase of tangible personal property and were therefore exempt from Pennsylvania sales and use tax. The intellectual property like the design and theming was a separate and distinct transaction and therefore not bundled with the sale of the machines and operating software. (Downs Racing, LP v. Commonwealth of Pennsylvania, Pennsylvania Supreme Court, Nos. 70 MAP 2017 and 71 MAP 2017, October 25, 2018)

Posted on December 11, 2018