Before delving headfirst into the taxation of intellectual property, it is important to understand what constitutes intellectual property and how it relates to intangible property. Intangible property is any property that has no physical substance, and intellectual property is intangible property created by individual(s).
While these terms are often used interchangeably, some types of intangible property are not intellectual property because they have no “creators”, such as, the contractual right of first refusal.
While there are important distinctions between intangible and intellectual property, the Internal Revenue Code does (IRC) not generally differentiate between them. Instead, the IRC treats the types of intangible property differently. There are seven major categories of intangible property that this blog analyzes:
● Trademarks are unique signs, names or designs related to a particular product or service. Examples are the names McDonalds, Coca-Cola, and the Nike “swoosh” symbol.
● Patents are granted for inventions of new, obscure and useful machines, materials, processes or similar item. Examples of patentable ideas are the incandescent light bulb, the seatbelt, anti-lock brakes, and a new chemical compound.
● Copyrights protect the manner or form in which ideas are conveyed whether in writing, artistically, or orally. It is important to note that only the manner or form is protected. So, for example, the book Romeo and Juliet is copyrightable, but the idea of star crossed lovers is not copyrightable – think West Side Story. Examples of copyrightable materials are songs, books, poems, drawings, and photographs.
● Trade Secrets are information that is not known to the public, derives value from it being not known to the public and reasonable measures are taken to protect the information from disclosure. The most famous example of a trade secret is the formula for Coca-Cola.
● Contractual Rights are rights created by contract. Examples of such rights are a right of first refusal, buy options, or even a right to provide a service (such as mowing a lawn) for a fee for a certain period of time.
● Goodwill is the reputation that is associated with a company or a brand.
● Computer Software is the collection of lines of computer code that provide a set of instructions to tell a computer what to do. Examples of computer software are Microsoft Word, Google Chrome, and Apple’s Siri.
In future posts, we plan on discussing the taxation of all seven categories listed above, focusing onpatents, copyrights, and computer software.