Was an additional music royalty for worldwide use part of the taxable price of a sound-recorded motion picture?

Plain-English summary

A sound-recording company recorded narration and music onto 16mm educational or travelogue motion pictures. Its standard royalty covered United States non-theatrical use, while one customer requested worldwide music clearance for an additional royalty.

The 1954 opinion treated fabrication or processing of the customer's tangible property as a taxable sale. It reasoned that the expanded right to use the finished picture worldwide made the transferred property more valuable, so the separately stated additional royalty was an integral part of the sale price.

An appended official note says that sections 6010.6 and 6362.5 later amended the application of tax to sound recordings and sound for motion pictures. The source does not date or explain that amendment note.

Citations and references

• California Revenue and Taxation Code sections 6010.6 and 6362.5 — identified only in an undated appended note stating that tax treatment was amended; note supplies no author, enactment date, text, explanation, or application to the transaction
• March 31 letter asking about an additional royalty for worldwide use of music recorded onto a customer's 16mm motion picture — letter and supporting records not reproduced in the official PDF
• United States non-theatrical music royalty paid to a copyright owner and separately stated additional royalty for worldwide clearance — facts supplied; recording contract, copyright license, clearance, discs, pictures, invoices, royalty calculations, and payments not reproduced in the official PDF
• Official Annotation 295.0540's music, sound-recording motion picture, sales-price, gross-receipts, and May 10, 1954 summary — annotation omits the March 31 request, 16mm educational or travelogue facts, domestic and worldwide license distinction, copyright-owner payment, fabrication analysis, separately stated charge, undated statutory-amendment note, missing records, and later outcome and supplies no additional license or transaction record
• Possible recording, license or clearance issuance, picture delivery, royalty payment, return filing, audit, assessment, refund claim, appeal, statutory-note application, or other later agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0540.pdf

Original ruling text

295.0540

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 10, 1954

Your letter of March 31

You are a sound recording company and record narration and music onto 16mm motion pictures, generally of an educational or travelogue nature. The music is from discs for which you charge a royalty which, in turn, is paid to the copyright owner. The royalty allows the use of the music in the United States for non-theatrical purposes. Recently a customer has requested a clearance for world-wide use of the music for which an additional royalty is charged. You inquire concerning the application of the sales tax to this additional royalty. The fabricating or processing of tangible personal property for a consumer is regarded as a sale and the charges for such fabricating or processing are subject to the tax. The mere transfer of bare legal title to tangible personal property without the right to use that property would be a nullity. A sale of tangible personal property with the right to use in the United States is a sale and subject to the tax. A sale of tangible personal property with the right to use throughout the world is also a sale and is subject to the tax. The measure of tax is higher in the latter case because the right transferred is more valuable. The fact that the additional fee for world-wide use is separately stated does not make it any the less an integral part of the sale itself.

Yours very truly,

Bill Holden
Assistant Counsel
BH:ja
cc: Los Angeles -Auditing
*note: the application of tax to charges for sound recordings and charges for sound for motion pictures is amended. (Section 6010.6 &6362.5)