Were per-procedure patent and technology license fees required to operate an eye-surgery machine subject to Louisiana sales tax?

Plain-English summary

Louisiana required sales tax on the patent and technology license fees that eye surgeons paid each time they used a surgical machine.

The surgeons owned the machine, but its manufacturer retained the intellectual-property rights needed to operate it. The machine could not perform its intended function unless the surgeons paid the per-procedure fees.

The Department treated the right to use the technology as inseparable from the machine. Separately stating or labeling the charge as a patent or license fee did not turn it into a nontaxable amount.

Why the technology charge followed the equipment

The ruling relied on McNamara v. Electrode Corporation, where technology and patent-license fees tied to leased anodes were included in the taxable lease price. That court looked to the substance of the arrangement and rejected splitting inseparable tangible property and technology into taxable and nontaxable contracts.

The Department applied the same reasoning to the surgical machine: ownership or possession had little value without the right to use the patented procedures necessary for its operation.

Common questions

Q: Were the per-procedure license fees taxable?

A: Yes. Louisiana state sales tax had to be collected and remitted on those fees.

Q: Did separate invoicing make the technology fee nontaxable?

A: No. The ruling focused on the substance of the transaction, not the fee's label or separate statement.

Q: Why was the intangible right taxable with the machine?

A: The machine could not be used for its intended purpose without that patented technology, making the two inseparable under the ruling's analysis.

Q: Does this decide every medical-software or license-fee arrangement?

A: No. The ruling addressed technology that was necessary to operate this purchased surgical machine.

Citations and references

• Shirley McNamara v. The Electrode Corporation, 418 So. 2d 652 (La. App. 1st Cir. 1982)
• Saenger Realty Corporation v. Grosjean, 194 La. 470 (1940)
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-014

Original ruling text

Revenue Ruling
No. 06-014
Sales Tax
Sales Taxability of Fees Paid for the Right to Use Eye Surgical Machine
September 19, 2006
The purpose of this Revenue Ruling is to discuss the sales taxability of fees that are
sometimes charged to eye surgeons for the use of eye surgery equipment.
Facts
A group of eye surgeons performs surgery within its offices through the use of a machine
that the surgeons have purchased from the manufacturer of the machine. When the
manufacturer sold the machine, the manufacturer retained the intellectual property rights
to the technology that is necessary for the operation of the machine. For each surgical
procedure for which surgeons uses the machine, the surgeons must pay fees to the
manufacturer for the use of the patented procedures that are necessary for the operation of
the machine. The machine cannot be used for its intended purpose without the payment
of the patent and license fees.
Issue
The question is whether the state sales or use tax is due on the fees that must be paid to
the manufacturer of the machine for the use of the patented technology that is necessary
to operate the machine for the machine’s intended purpose.
Analysis
The right to use tangible personal property for its intended purpose must necessarily be
acquired by the possessor or owner of the property in order for the property to have any
value to the possessor or owner. The right to possess or own and the right to use are thus
inextricably associated. One would not acquire ownership or possession of the surgical
machine without also acquiring the right to use the property just as the buyer or lessee of
a vehicle would not also acquire the right to drive the vehicle.
In Shirley McNamara v. The Electrode Corporation, 418 So. 2d 652 (La. App. 1 Cir.,
5/25/82), the First Circuit Court of Appeal held that the fees that a lessor derived under
its “Technology and Patent License Agreement” from the lessees of its anodes were
subject to the lease-rental tax, even though those fees were separately stated. Quoting the
Court:
“The substance of a contract, not the wording of it, nor the splitting or
dividing it up by the contracting parties, is controlling. The taxpayer
cannot defeat the Department's collection of taxes by either the wording,
form, or label of a contract. Saenger Realty Corporation v. Grosjean, 194
La. 470 (1940).
“The Saenger case, supra, dealt with a similar issue, and in its opinion, the
Supreme Court stated:

Revenue Ruling No. 06-014
Page 2 of 3

“‘We are not concerned with the wording of the contract or
how it is labeled, because this is not a suit between the
contracting parties. If the State has a right to tax a subject
matter of the contract, it could not be defeated by the label the
contract was given or the words used by the contracting
parties.’
“In Saenger, as in the instant case, it is clear that the transfer of
technology without the tangible personal property is worthless and
therefore the technology (intangible item) is merely incidental to the
tangible item and therefore subject to Louisiana sales/use and lease/rental
tax. Many tangible items have certain intangible values without which the
usage would be either impractical or impossible. The legislature, in
enacting a Louisiana sales/use and lease/rental tax has authorized the
taxing of intangible rights closely connected to items of tangible personal
property. Otherwise, every contract would have to be closely scrutinized
to determine what proportion of the money involved should be allocated to
tangible personal property and what portion should be allocated to
intangible rights.
*

*

*

The split contracts (Technology and Patent License Agreement-Anode
Lease Agreement) are in essence the same agreements but spelled out in
different contracts and different words. The true object of these contracts,
whether labeled "Technology and Patent License Agreement" or "Anode
Lease Agreement", were the anodes. Without the anodes, the technology,
know-how, etc. would have been of no use to Louisiana industries. The
statutes and jurisprudence do not allow the separation of gross proceeds
from a lease into nontaxable part attributable to royalty or a part deemed
service. A thorough examination of the record does not reveal that
substantial services were performed, especially for a particular lease, but
merely portrays the availability of Electrode personnel to Electrode's
customers for problem solving, technical advice, etc.
*

*

*

In the instant case, any know-how or technology is certainly inseparable
from the hardware (anodes). The anodes simply cannot be leased without
the accompanying technology and know-how and are not even transferred
to the lessee until various secrecy and other lease agreements have been
signed. The alleged technology or know-how is an inseparable part of the
hardware (anode) and for that reason must be included as part of the total
price of the lease of anodes. No breakdown between "intangible
technology" and "tangible personal property" is allowable in the instant
case. Cf. Saenger, supra.”

Revenue Ruling No. 06-014
Page 3 of 3

Ruling
The department follows the logic of the Louisiana First Circuit Court of Appeal in
McNamara v. Electrode. Sellers, lessors, and their customers cannot separate the sale of
the ownership of a thing from the right to use the thing for the purpose of taxing one
portion of the price of the property and not the other.
The Louisiana state sales tax must be collected and remitted on the amount paid for the
patent license fees for the use of the technology necessary to operate the surgical
machine.
Cynthia Bridges
Secretary
By: Raymond E. Tangney
Senior Policy Consultant
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue
employees. It is issued under LAC 61:III.101.C to apply principles of law to a specific set of facts. A
Revenue Ruling does not have the force and effect of law and is not binding on the public. It is a
statement of the Department's position and is binding on the department until superseded or
modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.