Justice MEDINA delivered the opinion of the Court.
This appeal arises from a franchise tax dispute involving the apportionment of receipts from the licensing of geophysical and seismic data to customers in Texas. The taxpayer complains that the Comptroller has mischaracterized these receipts as Texas business and thereby has erroneously increased its franchise tax burden. At issue is whether these receipts should be categorized as receipts from the use of a license or as receipts from the sale of an intangible asset. If the receipts are from the use of a license, then the Comptroller has correctly assessed the tax. If the receipts are from the sale of an intangible, then the Comptroller has erred in assessing additional taxes because receipts from the sales of intangibles are Texas receipts only if the legal domicile of the payor is Texas.
The lower courts concluded that the Comptroller had appropriately characterized the revenue as receipts from the use of a license in Texas and therefore correctly assessed the additional taxes. 268 S.W.3d 637 (Tex.App.-Austin 2008). We disagree and reverse and remand to the trial court for further proceedings.
The taxpayer is TGS-NOPEC Geophysical Company ("TGS"), a Delaware Corporation with its principal place of business in Houston, Texas. It gathers, interprets, and markets seismic and geophysical data regarding subsurface terrains worldwide with sophisticated seismic equipment and software technology. TGS collects and stores this data in a master library and licenses various parts of the library to customers who use the licensed data to evaluate oil and gas formations for drilling operations. TGS requires its customers to enter into a master license agreement, which governs the parties' rights and obligations. The master license agreement describes TGS's seismic data as proprietary information and as valuable and highly confidential trade secrets. The master license agreement also states that TGS 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, TGS and the customer enter into a specific license agreement under the master license agreement. TGS 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. TGS delivers the data to its customers in tangible media forms such as magnetic tapes, printed materials, or film. Each piece of data provided by TGS includes the following notice:
The licensing agreements are nonexclusive, and TGS may license the same data to multiple customers. Its customers receive unlimited access to the data under the specific license purchased, but they cannot disseminate the information to third parties, nor is the license transferrable.
The Comptroller audited TGS in 2004 for the 1997-2000 and 2001-2003 tax years and concluded that TGS owed additional franchise taxes, penalties, and interest. The audit deficiency arose from the Comptroller's determination that, for apportionment purposes, a significant amount of TGS's receipts should have been characterized as Texas receipts rather than non-Texas receipts. This caused a larger percentage of TGS's earned surplus and taxable capital to be subject to the franchise tax. The contested gross receipts are revenue that TGS received from licensing its seismic data to customers in Texas. TGS characterized these receipts as revenue from the sale of intangibles. TGS reported some of these receipts as coming from "other business done in the state," but the bulk of these receipts were reported as falling outside the category of business done in Texas. Receipts from the sale of intangibles are Texas receipts only if the payor is located in Texas. 34 TEX. ADMIN. CODE § 3.549(e)(30)(B). The payor's location is deemed to be its legal domicile.
For many years, the Comptroller characterized TGS's licensing of its geophysical information as the sale of an intangible and allocated the revenue TGS derived therefrom to the customer's legal domicile. See TEX. TAX CODE § 171.103(a)(6). The Comptroller's 2004 audit, however, characterized this revenue as receipts from the use of a license. This determination is significant because receipts from the use of a license are allocated to Texas if the license is used in Texas, whereas receipts from the sale of an intangible sold and used in Texas are not allocated to Texas, if the payor's domicile is elsewhere. TEX. TAX CODE § 171.103(a)(4); see also 34 TEX. ADMIN. CODE § 3.549(e)(30)(A)(iii) (providing that revenue an owner of a license receives is included in Texas receipts to the extent the license is used in Texas). The Comptroller's audit also concluded that most of TGS's licenses were used in Texas, which increased its Texas receipts and franchise taxes. After the audit, TGS owed $1,394,748.11 in additional franchise taxes and $333,741.60 in penalties and interest.
TGS paid the additional taxes, penalties, and interest under protest and timely filed this suit. See TEX. TAX CODE § 112.052(a) (requiring taxpayer to pay contested taxes as a predicate to filing suit). TGS and the Comptroller filed cross motions for summary judgment in the trial court, which granted both motions in part. The trial
The dispute here is over how the receipts TGS generates from licensing its data should be allocated. TGS asserts that the revenue it earns 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. TEX. TAX CODE § 171.103(a)(6). The Comptroller, on the other hand, argues that this revenue is derived from the use of a license because TGS employs license agreements to complete its sales in Texas. Receipts from the use of a license are allocated to the state in which the license is used. Id. § 171.103(a)(4).
The court of appeals agreed with the Comptroller, holding that "[t]he gross receipts earned by TGS are derived from TGS' use of a license within the meaning of the statutes." 268 S.W.3d at 646. The court thus interpreted the statutory phrase "use of a license" to apply to the use of a license as a transfer mechanism. See id. at 645 (holding that "the payments received by TGS for licensing its customers to use proprietary seismic data are gross receipts from the use of a license"). The question then is whether the act of licensing an intangible asset is the "use of a license" within the meaning of the franchise tax statute. To answer that question, we begin with the purpose and operation of the Texas franchise tax statute. See TEX. TAX CODE ch. 171.
The franchise tax is a tax on the privilege of doing business in Texas. Bullock v. National Bancshares Corp., 584 S.W.2d 268, 270 (Tex.1979), cert. denied, 444 U.S. 1016, 100 S.Ct. 667, 62 L.Ed.2d 645 (1980). It is imposed on each taxable entity that does business in this state or that is chartered or organized here. TEX. TAX CODE § 171.001(a); see also id. § 171.002 (defining taxable entity). Before 2008, the franchise tax was imposed on an entity's capital or earned surplus. See Act of May 30, 1997, 75th Leg., R. S., ch. 1185, §§ 5-6, 1997 Tex. Gen. Laws 4569, 4569-70. The tax code, however, presently imposes franchise tax on an entity's "taxable margin." TEX. TAX.CODE §§ 171.002, .101; see Act of May 2, 2006, 79th Leg., 3rd C.S., ch.1, § 2, 2006 Tex. Gen. Laws 1, 6 (amending TEX. TAX CODE § 171.002). Because all of a company's capital, earned surplus, or taxable margin may not be attributable to business done in Texas, receipts must be apportioned between Texas and other jurisdictions. The tax code does this by multiplying an entity's capital, earned surplus, or taxable margin (depending on the applicable version of the code) by a fraction, the numerator of which consists of receipts from business done in Texas (Texas-sourced receipts), and the denominator of which consists of all receipts from business anywhere, including Texas. TEX. TAX.CODE § 171.006.
In sourcing receipts to Texas, the tax code identifies business done in this state as the sum of the taxable entity's gross receipts from the following activities:
TEX. TAX CODE § 171.103(a)
The Comptroller is charged with administering the provisions of the franchise tax. See TEX. GOV'T CODE § 403.011 (enumerating general powers of the Comptroller's office). The Legislature has given the Comptroller broad discretion to adopt rules for the collection of taxes and other revenues so long as such rules do not conflict with state or federal law. See TEX. TAX.CODE § 111.002(a).
If there is vagueness, ambiguity, or room for policy determinations in a statute or regulation, as there is here, we normally defer to the agency's interpretation unless it is plainly erroneous or inconsistent with the language of the statute, regulation, or rule. See Pub. Util. Comm'n v. Gulf States Utils. Co., 809 S.W.2d 201, 207 (Tex.1991); Stanford v. Butler, 142 Tex. 692, 181 S.W.2d 269, 273 (1944). Here, the Comptroller is the administrative agency charged with enforcing the tax code, and her construction of the code is therefore entitled to serious consideration. See Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993).
Deference to the agency's interpretation, however, is not conclusive or unlimited. See Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 254-55 (Tex. 1999). We defer only to the extent that the agency's interpretation is reasonable, and no deference is due where an agency's interpretation fails to follow the clear, unambiguous language of its own regulations. See Pub. Util. Comm'n, 809 S.W.2d at 207. We further interpret administrative rules, like statutes, under traditional principles of statutory construction. Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex.1999).
The history of the franchise tax indicates that the Comptroller has been allocating receipts from intangibles to the state of the payor's domicile since 1917. Humble Oil & Refining Co. v. Calvert, 414 S.W.2d 172, 180 (Tex.1967). This practice ended in 1959, in part, when the Legislature amended the sourcing statute to require use-based sourcing for two kinds of intangibles, patents and copyrights. See Act of August 6, 1959, 56th Leg., 3rd C.S., ch. 1, art. 12.02, 1959 Tex. Gen. Laws 187, 307 (sourcing "royalties from the use of patents or copyrights" to their place of use). Before this, the sourcing statute consisted of a single catch-all provision, for business done in the state, similar to subsection (6) of the current statute.
After the 1959 amendment, receipts from intangible assets, other than patents and copyrights, continued to be taxed as other business under the "location of the payor" rule until 1988, at which time the Comptroller began sourcing revenue from three additional intangible assets based on location of use. The Comptroller made this change by promulgating a new rule. Rule 3.403(e)(11) provided that "[r]eceipts to the owner for the use of trademarks, franchises, and licenses are allocated according to the location where used." 12 Tex. Reg. 2971 (1988) (to be codified at 34 Tex. Admin Code § 3.549). After Rule 3.403(e)(11)'s adoption, the Comptroller began sourcing receipts from licensing trademarks, franchises, and licenses according to their place of use, like patents and copyrights. Receipts from licensing other types of intangible assets, however, continued to be sourced to the location of the payor under the catch-all provision pertaining to "other business."
Comptroller Letter Ruling 9005L1019F09 (5/1/1990); see also Comptroller Letter Ruling 9103L1087B07 (3/1/1991) (issuing similar ruling to another licensor of seismic data). These rulings recognized that Rule 3.403(e)(11)
The Legislature did not amend the sourcing statute to match the Comptroller's sourcing rule on trademarks, franchises, and licenses until 1997. After this amendment, subsection (4) of the sourcing statute provided that "gross receipts of a corporation from its business done in this state [includes] the corporation's receipts from ... the use of a patent, copyright, trademark, franchise, or license in this state ..." Act of May 20, 1997, 75th Leg., R. S., ch. 1185, § 5, 1997 Tex. Gen. Laws 4569, 4570. The amendment equalized the tax treatment among similar intangible assets by adding licenses, trademarks, and franchises to the provision governing patents and copyrights. Id. Although other amendments to the franchise tax have followed, the sourcing statute has not materially changed since 1997. Gross receipts derived from a license continue to be sourced to Texas when the license is used in this state. TEX. TAX CODE § 171.103(a)(4).
The Comptroller argues that because TGS uses a license agreement to transfer seismic data to its Texas customers, the receipts are from the use of a license in Texas. She further argues that the phrase "use of a license" encompasses licensing because there is no qualifying language in subsection (4) or in any other part of the sourcing statute to suggest that the licensing of data does not constitute the use of a license. The Comptroller concedes that previously the licensing of seismic data was sourced as a general intangible under the "location of the payor" rule, but she maintains that the Legislature changed that practice in 1997 when it decided to tax licenses like patents and copyrights, according to their place of use.
As the arguments indicate, the term "license" has more than one meaning. It can be used as a verb to convey the act of giving permission or as a noun to represent the permission or right granted. See WEBSTER'S NEW INTERNATIONAL DICTIONARY 1425 (2d ed.1960). As such, its use in the statute is ambiguous.
Instead of focusing on the word "license," as the Comptroller and court of appeals have done, the word must be read in the context of the whole statute and consideration given to what it means to "use a license." See City of Sunset Valley, 146 S.W.3d at 642; Mega Child Care, 145 S.W.3d at 176. Language cannot be interpreted apart from context. The meaning of a word that appears ambiguous when viewed in isolation may become clear when the word is analyzed in light of the terms that surround it.
The statute sources to Texas "receipts from the use of a patent, copyright, trademark, franchise, or license" to the extent they are used in Texas. TEX. TAX CODE § 171.103(a)(4). The canon of statutory construction known as noscitur a sociis, or "it is known by its associates" directs that similar terms be interpreted in a similar manner. See Fiess v. State Farm Lloyds, 202 S.W.3d 744, 750 n. 29 (Tex.2006) (quoting BLACK'S LAW DICTIONARY 1087 (8th ed.2004)). Thus, we interpret
Considering how the statute applies to patents and copyrights is therefore instructive. When a business wishes to manufacture a patented item, it must purchase the patent or obtain permission to use the patent from the owner. Permission is usually granted in the form of a license. When the licensee thereafter produces the patented item, it uses the patent, and its payments to the patent's owner are "receipts from the use of a patent." See TEX. TAX CODE § 171.103(a)(4). The revenue or royalties that the patent owner receives is included in Texas receipts to the extent that the patent is used in production, fabrication, manufacturing, or other processing in Texas. 34 TEX. ADMIN. CODE § 3.549(e)(30)(A)(i). Even though a license is part of this transaction, the receipts are from the use of the underlying intellectual property, the patent, not from the use of a license.
Similarly, when a business wishes to publish copyrighted material, the owner of the copyright must grant permission through a license. When the licensee publishes the copyrighted material, it uses the copyright, and its payments to the owner are receipts from the use of a copyright. See TEX. TAX CODE § 171.103(a)(4). Revenue the copyright owner receives from the use of its copyright is included in Texas receipts to the extent the copyright is used in Texas. 34 TEX. ADMIN. CODE § 3.549(e)(30)(A)(ii). Even though a license is part of this transaction, the receipts are from the use of the underlying intellectual property, the copyright, not from the use of a license.
In these two situations, the owner of the intangible asset uses a license to convey limited rights to its intellectual property. But the revenue produced is not from the use of a license in Texas; it is from the use of the underlying intellectual property, the copyright or the patent. Similarly, the revenue TGS receives from conveying its geophysical data is not derived from the use of a license but from the use of the underlying intellectual property, the data. The term "license" in subsection (4) of the sourcing statute therefore refers to licenses that are themselves revenue-producing assets. It does not include the mechanism of licensing, which would subsume all intangible assets. Had that been the Legislature's intent, it would not have been necessary to name the intangible assets specifically as the Legislature has done in subsection (4). See In re M.N., 262 S.W.3d at 802 (presuming that the "Legislature included each word in the statute for a purpose ... and that words not included were purposefully omitted").
The Comptroller's own administrative interpretation of the sourcing statute further contradicts her argument here. The Comptroller's regulations provide: "revenue that the owner of a trademark, franchise, or license receives is included in Texas receipts to the extent the trademark, franchise, or license is used in Texas." 34 TEX. ADMIN CODE § 3.549(e)(30)(A)(iii) (former franchise tax); id. § 3.591(e)(21)(A)(iii) (margin tax) (emphasis added). Under this rule, the intangible asset that is "used" must be owned by the revenue recipient and used by someone else. The underlying asset in a licensing transaction meets this standard because it is owned by the licensor, who receives the revenue, not the licensee, who uses the intangible asset. In contrast, the license resulting from a licensing transaction does not meet this standard because the licensee owns the license.
Moreover, the Comptroller's construction of the statute conflicts with her rule regarding the licensing of software. By rule, the Comptroller allocates receipts from licensing software to the location of the payor under subsection (6) as sales of intangibles. See 34 TEX. ADMIN. CODE § 3.549(e)(30)(A)(iii), (e)(7); TEX. TAX CODE § 171.103(a)(6). Because a license is used to transfer the underlying intangible, however, the Comptroller's argument in this case would dictate allocation of the receipts under subsection (4). TEX. TAX CODE § 171.103(a)(4). The Comptroller accordingly is inconsistent when equating the licensing of an intangible asset with the use of a license in this state. See TEX. TAX CODE § 111.002 (providing that Comptroller's rules must not conflict with state or federal law); see also Pub. Util. Comm'n, 809 S.W.2d at 207; Stanford, 181 S.W.2d at 273 (stating that an agency's construction of a statute may be considered only if it is reasonable and not inconsistent with the statute).
The Legislature could have allocated receipts from the use of intangible assets in this state to subsection (4) of the sourcing statute, generally, but it did not. See, e.g., TEX. TAX CODE § 171.0004(d) (providing that an "entity conducts an active trade or business if assets, including royalties, patents, trademarks, and other intangible assets, held by the entity are used in the active trade or business of one or more related entities") (emphasis added). Some states do allocate revenues from intangible assets generally to the place of their use, but our Legislature has chosen to specifically name the intangibles which qualify for such treatment.
Justice HECHT and Justice GUZMAN did not participate in the decision.
34 TEX. ADMIN. CODE § 3.549(b)(6).