How could a lessor tax artwork or negatives acquired from a related seller and then leased to a third party?

Plain-English summary

A sole proprietorship sold artwork or negatives to a corporation, which then leased them to a third party. The requester proposed treating the first transfer as a sale for resale, with tax applying to the corporation's lease receipts.

Tax counsel agreed that structure was possible when acquisition tax had not been paid. Alternatively, the lessor could pay tax on its acquisition and avoid tax on the lease transaction.

If the lessor chose acquisition tax, the measure included every amount it had to pay the seller, including reproduction rights. The letter reasoned that the artwork or negatives would have little value to the lessor without those rights and said the Board had rejected excluding reproduction-rights payments under the new publishing regulation.

A nominal related-party purchase price that did not reflect reproduction value would not establish that tax had been paid on the acquisition. In that event, tax would apply to rental receipts.

What this means for you

Artwork and photography licensors

Separate corporate entities do not eliminate the need to value the tangible artwork, negatives, and reproduction rights included in the acquisition.

Lessors

Choose and document the applicable tax path: taxable acquisition or taxable rental receipts. The opinion did not permit both the lease exemption and an artificially low acquisition measure.

Accountants and tax professionals

Scrutinize related-party pricing and reproduction-rights value. The source warns that a nominal transfer price can fail the acquisition-tax option.

Common questions

Q: Could the first sale be treated as a sale for resale?

A: Yes, with tax then applying to the lessor's rental receipts if acquisition tax was not paid.

Q: Could the lessor instead pay tax when it bought the property?

A: Yes, which could avoid tax on the later lease.

Q: Were reproduction-rights payments excluded from acquisition tax?

A: No. The letter included them in the measure.

Q: What if the lessor paid only a nominal purchase price?

A: If the amount did not reflect reproduction value, the Board would treat acquisition tax as unpaid and tax the rentals.

Citations and references

• California Revenue and Taxation Code § 6596
• California Sales and Use Tax Regulation 1543

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0030.800
• Original supporting opinion: 100.0030.800 PDF

Original ruling text

100.0030.800

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 445-3723

December 12, 1990

Mr. J--- V---, Esq.
---, --- & --Attorneys at Law
Suite XXX, --- --XXXXX --- --- -----, CA XXXXX
Re:

G--- P--SN -- XX-XXXXXX

Dear Mr. V---:
This is in response to your letter of October 19, 1990, directed to our Culver City office. Your letter was referred to this office for reply. We apologize for the delay in our response. You have requested our opinion, under Revenue and Taxation Code section 6596, which provides that a person may be relieved of taxes, interest, and penalties, if their failure to make a timely return or payment is due to the person’s reasonable reliance on written advice from the Board. We understand that your client, G--- P--- (“GP”), a sole proprietorship, sells artwork and/or negatives to G--- P--- M---, Inc. (“GPM”). GPM then leases the artwork and/or negatives to a third party. It is your analysis that the sale from GP to GPM may be treated as a sale for resale. The lease from GPM to the third party would be subject to tax if GPM had not paid tax with respect to the acquisition of the artwork and/or negatives. You are correct that GPM could pay tax on its acquisition and thus avoid tax on the lease transaction. The measure of tax with respect to the acquisition, however, would include all amounts required to be paid by GPM to GP, including the amount paid for any reproduction rights. It would appear that the artwork and/or negatives would be valueless to GPM unless GPM acquires reproduction rights. The Board has just adopted its Regulation 1543 concerning the publishing industry. In adopting the regulation, the Board rejected the contention of the industry that the amount paid for reproduction rights may be excluded from tax where there is a transfer of all right, title and interest, including the right to reproduce with respect to artwork or negatives, or where there is a leasing of such artwork and/or negatives with a limited right to reproduction.

Mr. J--- V---

-2-

December 12, 1990
100.0030.800

It would appear that while the sale price from GP to GPM would be less than the aggregate rental receipts to be derived by GPM from their parties, the differential would not be substantial. If GPM were to pay GP only a nominal amount and not an amount reflective of the reproduction value of the artwork or negatives, then the Board would conclude that tax had not been paid with respect to the acquisition of the property and tax would apply to rental receipts. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr
cc:

Mr. H. Murray
Supervising Tax Auditor
Culver City District