How did California tax a stage-production company's design work, scenery, models, out-of-state projects, installation, and equipment rentals?

Plain-English summary

A design and production firm developed stage presentations, including scenery, rigging, rented equipment, labor, site surveys, talent, and music. Tax counsel analyzed the firm's activities item by item.

Design-only work was taxable when drawings, floor plans, lighting designs, blueprints, or similar tangible designs were transferred to the client. When the company both designed and produced property, the design charge was part of the taxable sale. It could not exclude preliminary art that it prepared for its own production use rather than furnishing finished art to the client.

Models were taxable whether or not the company also designed the production. A temporary technical platform constructed for the client's use was also taxable. For retail sales of designs or scenery, miscellaneous services, production management, site labor, and site surveys remained in gross receipts, although separately qualifying installation labor was excluded.

A sale shipped outside California under the contract could avoid California sales tax when the company shipped by its own facilities or delivered to a carrier or forwarding agent for the out-of-state destination, assuming the purchaser did not bring the property back for California use.

Sales tax was reportable in the period when the sale occurred, which could differ from payment. A retainer received before title or possession transferred did not by itself set the reporting period.

For an actual equipment sublease, the letter said tax would not apply to the sublease if tax had been paid on rental receipts under the prime lease. The answer assumed a true sublease rather than simply including equipment cost in the platform price.

What this means for you

Stage and event-production companies

Break projects into the actual transfers and services. A broad production contract can contain taxable designs, scenery, models, platforms, and rentals alongside potentially excluded installation labor.

Clients with out-of-state shows

Destination and contractual shipping duties matter. The opinion required an out-of-state transfer through the seller's delivery or a carrier and assumed no return for California use.

Accountants and tax professionals

Track the sale date separately from retainers and progress payments. Also distinguish a genuine equipment sublease from equipment used by the producer to perform its own contract.

Common questions

Q: Were standalone stage-design drawings taxable?

A: Yes, when the company transferred the designs to the client.

Q: Could the company exclude preliminary art used to build its own finished property?

A: No. The letter said that exclusion was limited to the stated situation where the designer furnished finished art to the client.

Q: Were installation charges taxable?

A: Qualifying labor to install the property sold was excluded, while the other listed production and site charges remained in taxable gross receipts.

Q: When was tax reported if the company received a retainer first?

A: In the reporting period when the sale occurred, such as when title or possession transferred, not automatically when the retainer was received.

Citations and references

• California Revenue and Taxation Code § 6012(c)(3)
• California Sales and Use Tax Regulations 1540(b)(4)(A), 1540(c), 1546, 1620(a)(3)(A), and 1660(c)(5)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 100.0125
• Original supporting opinion: 100.0125 PDF

Original ruling text

100.0125

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

October 23, 1991

Ms. A. S--- A--G--XXXX --- ----- ---, CA XXXXX
Dear Ms. A---:
This is reply to your September 9 and October 9, 1991 letters regarding the application of sales tax to charges by one of your clients. You explained: “The company is a design, communications, and production firm. Primarily, they are responsible for the concept design and follow through to the finished product of stage presentations. This includes the scenery, stage rigging, equipment rental, labor, site surveying, talent, music, etc.” Given this information, you asked the following specific questions: “1.) If the company is designing for a client only, is this taxable? The services included would be conceptual design, drafting, floor plans, lighting design and blueprinting.” The charge for such design is subject to sales tax. Sales and Use Tax Regulation 1540, Advertising Agencies, Commercial Artists and Designers, provides at subdivision (c): “The tax applies to the entire amount charged by commercial artists or designers for items of tangible personal property such as drawings, paintings, designs or sketches transferred to the client, whether or not the property is suitable for display or is useful for actual reproduction by photo-mechanical or other processes. “Tax does not apply to separate charges for preliminary art as defined in (b)(4)(a).”

Ms. A. S--- A---

-2-

October 23, 1991
100.0125

“2.) If the company is designing and producing as well, is the design service then taxable?” We assume that by “producing” you are referring to the company’s production of tangible personal property which it sells to its client. The charge for designing the tangible personal property is includable in the gross receipts of the retail sale of the property. In such case, where the company prepares the designs for its own use in producing the property, there is no basis for excluding charges for preliminary art from the taxable measure. Preliminary art is defined at subdivision (b)(4)(A) of Regulation 1540 and is limited to situations where the designer contracts to furnish finished art to the client. “3.) If the company provides only a model for the client, is it taxable? If the company provides the model along with designing the production, is it taxable?” The charge for a model is taxable whether the company designs the production or not. “4.) If the company is producing the show out of state, then there should be no tax charged?” Sales tax does not apply to sales of tangible personal property outside California. Sales tax does not apply when the company is required pursuant to the contract of sale to ship the property to a point outside this state and so ships the property by means of its own facilities or by delivering the property to a carrier, customers broker or forwarding agent, whether hired by the purchaser or not, for shipment to the out-of-state point. (Sales and Use Tax Reg. 1620, subd. (a)(3)(A).) Assuming that the tangible personal property the company sells or ships outside this state is not brought back into California by the purchaser for use in this state, neither sales tax nor use tax applies to the company’s sale of the property. “5.) When is the income reported on sales tax return? The company may receive a retainer and work on a project for several months before final completion. Should the expenses incurred during each month of the project be considered earned income, or be recorded when the project is completed and paid for?” The company must report sales tax for the reporting period in which the sale is made, which may or may not be the same period in which the company receives payment. For example, if the company receives a retainer in one reporting period and transfers title or possession of the tangible personal property in the following reporting period, the tax should be reported in the latter reporting period.

Ms. A. S--- A---

-3-

October 23, 1991
100.0125

You listed a number of items and asked for the application of tax to the company’s charge for the items. When the company makes a retail sale of designs or scenery, tax applies to the entire gross receipts of the sale with no deduction for charges for the various items you listed in your letter (e.g., miscellaneous services, production management, site labor, and site survey). The charge for labor to install the property sold is excluded from the gross receipts of the sale. (Rev. & Tax. Code § 6012, subd. (c) (3); Sales and Use Tax Reg. 1546, Installing, Repairing, Reconditioning in General.) We understand from your letter that the company will provide a “tech platform” to the client and remove the platform after production. From your description of the platform, we understand that the company would construct a platform for the client to use. Tax applies to the company’s charge for the platform. You also noted that the company will rent equipment (e.g., lighting, generators, special effects, rigging, etc.). You asked that we confirm your understanding that, if the company pays tax when they rent the equipment, then they do not charge the client tax, but if the company does not pay tax when they rent the equipment, then they charge the client tax. We assume that the company does not actually sublease the equipment to the client rather than merely incorporate the charge for the equipment into the charge for the platform. In such case, if the company pays tax on rental receipts on the prime lease from a lessor, tax does not apply to the company’s sublease of the equipment to the client. (Sales and Use Tax Reg. 1660, subd. (c)(5).) Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:sr