Were CD-ROM mastering fees taxable, and when were customer-owned manufacturing films shipped out of state exempt?

Plain-English summary

The service bureau sold CD-ROMs made by out-of-state subcontractors through injection molding and artwork imprinting. Manufacturers retained title to stampers and silk screens, stored them for reorders, and charged mastering fees that could decrease or disappear with order size; some customer quotes bundled the fee and discs. Counsel assumed the bureau bought the discs ex-tax for resale and made taxable retail sales inside California to customers not buying for resale.

Under those assumptions, charges passed through for stampers and silk screens were production costs included in taxable CD-ROM gross receipts. Calling them mastering fees, stating them separately, locating the tools outside California, or charging a fee when the manufacturer charged none did not change the result.

The bureau also sold customer-owned films used by out-of-state manufacturers. A film sale made in California could qualify for the interstate-shipment exemption when the contract required out-of-state shipment, the bureau or its subcontractor actually shipped it through an eligible carrier or forwarder, and the customer or its agent did not take California possession. Films manufactured, sold, and delivered for use outside California were not subject to California sales tax.

For known California-resident customers, the bureau could still have a use-tax collection duty unless it obtained the section 6247 statement or other satisfactory evidence. Later California entry could make the customer liable for use tax.

Refund claims for overpaid tax had to meet the stated three-year period, and customer-paid reimbursement had to be returned to customers before the seller received the refund.

The California-resident customer rule was a rebuttable presumption, not automatic tax in every case. Counsel required a written customer statement retained by the bureau or other evidence satisfactory to the Board that the films were not purchased for California use. The live annotation compresses this into customer certification.

The source later cites Regulation 1660(b)(3) for the 90-day entry and six-month outside-use rule even though it earlier cited Regulation 1620(b)(3). The PDF supplies no text resolving whether that is a citation error, so this page preserves the discrepancy.

For refunds, the letter said the claim should identify amount, dates and basis, include a copy of the opinion, and be filed within three years from the last day of the month following the close of the overpaid quarter. It said a seller refund would be granted only after reimbursing customers who paid the tax; it did not separately answer whether the seller had to initiate a claim.

No actual CD-ROM or film contract, fee, sale, shipment, California entry, tax filing, refund claim or later outcome is supplied.

Common questions

Did separate statement make a mastering fee nontaxable?

No. Counsel treated it as part of the retail CD-ROM charge whether separately itemized or bundled.

What if the bureau paid no mastering fee to the manufacturer?

The customer charge remained taxable under the assumed retail sale even when the manufacturer charged the bureau nothing.

Did out-of-state fabrication and storage of stampers change that result?

No. Their location did not alter gross receipts from the bureau's California retail CD-ROM sales.

When could a California-produced film sale avoid sales tax?

The contract had to require out-of-state shipment, the bureau or its subcontractor had to make qualifying shipment or carrier delivery, and neither customer nor agent could take California possession.

How could a California resident rebut the use-tax presumption?

With a retained written statement that the film was not purchased for California use or other evidence satisfactory to the Board.

What if the film later entered California?

The customer could owe use tax under the historical entry and outside-use test; the source's printed Regulation 1660/1620 discrepancy remains unresolved.

Could the seller retain a refund of customer-reimbursed tax?

Not under the cited historical rule. The letter required returning that amount to the customers before a seller refund would be granted.

Citations and references

• California Revenue and Taxation Code sections 6007, 6011, 6012, 6051, 6201 and 6401 and Regulation 1668 — cited for resale, retail sale, gross receipts and use tax; complete authorities, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6396 and Regulation 1620(a)(3)(B) — cited for contract-required out-of-state film shipment; complete authorities, proof, amendments, later history, and current law not supplied
• California Revenue and Taxation Code sections 6201–6203, 6247 and 6401 and Regulation 1620(b)(3) — cited for use tax, collection and the resident-customer presumption; complete authorities, proof, amendments, later history, and current law not supplied
• Regulation 1660(b)(3), as later printed for entry timing — unresolved against the source's earlier 1620(b)(3) citation
• California Revenue and Taxation Code sections 6006(a), 6010.5 and 6051 and Uniform Commercial Code section 2401 — cited for outside film sales; complete authorities, proof, amendments, later history, and current law not supplied
• California Revenue and Taxation Code sections 6901.5, 6902 and 6904 — cited for refund timing, claims and customer reimbursement; complete statutes, procedures, amendments, later history, and current law not supplied
• January 30 request and transaction records — not reproduced or absent; assumptions, sales, shipments, use, tax and refund outcomes remain unproved
• Official Annotation 325.0341 — compresses the mastering and film rules but omits the questions, assumptions, refunds, resident and entry analysis, citation discrepancy, missing evidence, outcome, and reliance status

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 325.0341
• Original supporting opinion: 325.0341 PDF

Original ruling text

325.0341

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Tele: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego

April 10, 1995

BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Re: --Dear Mr. ---:
This is in response to your letter dated January 30, 1995 requesting our opinion on the application of tax to the sales of goods and services related to the production of compact discs ("CD-ROM"). You state: "Our business is a CD-ROM service bureau. We sell goods and perform services relating to the production of compact discs. While we do not ourselves manufacture compact discs, we offer such manufacturing services, which we subcontract to out-of-state manufacturers. "Compact discs are manufactured by injecting molding, followed by the imprinting of artwork. Molds (known as stampers') and silk screens are used in the manufacturing process, but are not components of the finished product. Industry practice is to charge customers amastering fee' for the fabrication of stampers and silk screens, although the terms of sale states that title to those items remains with the manufacturer. The manufacturer generally stores the master stampers and silk screens for a period of time, so that reorders can be processed without the imposition of new mastering fees. Depending upon the quantity of discs ordered, mastering fees are routinely reduced or waived entirely. Also, some customers are provided all-inclusive quotations for a given number of discs; such quotations do not separately itemize the mastering fee." You ask a series of questions based on the above facts. Pursuant to your letter, we assume for questions 1(a) through 1(d) that your company sells the CD-ROMs to its customers inside this state and that your customers do not purchase these CD-ROMs for resale. Our responses to your questions are separately set forth below. "1(a): If separately stated, are mastering fees for the fabrication of stampers and silk screens subject to the sales tax? Remember that title to the master remains with the manufacturer and that the

Mr. ---

-2-

April 10, 1995
325.0341

customer never takes possession of the master stampers or silk screens." California imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property in this state unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) When sales tax does not apply, use tax is imposed on the sales price of property purchased from a retailer for the storage, use or other consumption in California. (Rev. & Tax. Code §§ 6201, 6401.) Taxable gross receipts or sales price include all amounts received with respect to the sale, with no deduction for the cost of the materials, service, or expense of the retailer passed on to the purchaser, unless there is a specific statutory exclusion. (Rev. & Tax. Code §§ 6011, 6012.) We understand that your company makes retail sales of CD-ROMs to its customers inside this state. To do so, your company contracts with a CD-ROM manufacturer to fabricate the CDROMs on your behalf. We understand that the CD-ROM manufacturer charges your company a separate "mastering fee" for the fabrication of goods (i.e., "stampers" and silk screens) which it uses in the process of manufacturing CD-ROMs. Title to these goods remains with the CDROM manufacturer. Upon completion of the manufacturing process, we assume that your company purchases the CD-ROMs extax for resale. (See Rev. & Tax. Code § 6007; Reg. 1668.) Your company then sells these CD-ROMs to its customers at retail and charges a separate amount as a "mastering fee" representing the manufacturer's charge to your company for fabrication of the "stampers" and silk screens. Under these facts, the "mastering fees" are part of the manufacturer's cost of producing CD-ROMs for sale to your company. This cost is passed on to your company as part of its acquisition price of the fabricated CD-ROMs. Your company in turn passes this charge on to its customers as a separately stated fee. This "mastering fee," whether separately stated or not, is part of your charge for the retail sale of CD-ROMs. As such, this fee is included in your company's taxable gross receipts whether separately stated or not. "1(b): We assume that when mastering fees are not separately stated, i.e. when customers are quoted a fixed price for a given number of compact discs, that sales tax applies to the entire sale amount regardless of the answer to question 1(a). Is this correct?" Yes. "1(c): If the answer to question 1(a) is that mastering fees are not subject to sales tax, then what latitude would we have in setting mastering fees so that they remain non-taxable? For example, we do not completely pass on to our customer the decrease in mastering fees that we obtain from the manufacturer as the number

Mr. ---

-3-

April 10, 1995
325.0341

of discs ordered increases. Would our imposition of a mastering fee be non-taxable even in cases where we paid no mastering fee to the manufacturer? Assume in your response that the fees are imposed for valid business reasons other than to avoid the payment of sales tax." As set forth above, your entire charge for the retail sale of CD-ROMs is subject to tax, without regard to whether the charge is itemized among its various components or billed as a single price. This is true whether or not a mastering fee is paid by your company to the CDROM manufacturer. "1(d): Are any of the above answers to the preceding questions contingent upon whether or not the stampers and silk screens are fabricated, used, and stored outside of state?" No. The "mastering fees" you pass on to your customers (whether separately stated or not) are part of your company's charge for the retail sale of CD-ROMs inside this state and are included in your company's taxable gross receipts. The location of the stampers and silk screens does not affect the gross receipts your company receives from its retail sales of CD-ROMs. "Our services include the fabrication of films from our customer's supplied artwork. We subcontract with companies to produce these films, and then ship the films to out-of-state vendors for use in preparing silk screens and printing plates for disc manufacturing and package printing. Our customers have title to these films, but generally don't take possession of them. Our second question regards the taxability of these films. "2(a): When we produce films in California for a customer, but ship those films to an out-of-state location where they are then used, is the price we charge the customer (separately stated on the customer's invoice) for such films subject to the sales tax?" We understand that your company purchases films from a subcontractor and then sells these films to its California customers. 1 Based on your statement that your company's customers "have title to these films," we assume that title passes to your customers in California. If so, sales tax applies on your company's sales of these films as a retail sale of tangible personal property inside this state unless an exemption otherwise applies. F

1

F

We assume that your company purchases these films extax from the subcontractor who produces the films. (See Rev. & Tax. Code § 6007; Reg. 1668.)

Mr. ---

-4-

April 10, 1995
325.0341

The only basis for an exemption to this particular transaction is the one set forth in Revenue and Taxation Code section 6396. That provision exempts sales in this state from sales tax when goods are shipped outside the state to a specific location under certain conditions. These conditions are explained in Sales and Use Tax Regulation 1620(a)(3)(B) as follows: "Sales tax does not apply when the property pursuant to the contract of sale, is required to be shipped and is shipped to a point outside this state by the retailer, by means of: 1.

Facilities operated by the retailer, or

2.
Delivery by the retailer to a carrier, customs broker or
forwarding agent, whether hired by the purchaser or not, for shipment to such out-of-state point. As used herein the term
carrier' means a person or firm regularly engaged in the business of transporting for compensation tangible personal property owned by other persons, and includes both common and contract carriers. The termforwarding agent' means a person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment. An individual or firm not otherwise so engaged does not become a carrier' orforwarding agent' within the meaning of this regulation simply by being designated by a purchaser to receive and ship goods to a point outside this state ...." Thus, sales tax applies to your company's sales of films unless, pursuant to your company's contract of sale with its customers, your company (or the third-party film manufacturer on your company's behalf) actually ships the films outside the state or directly sends the goods to a carrier, customs broker or forwarding agent for out-of-state shipment and neither the customer nor its agent obtains possession of the property inside California. This exemption does not mean, however, that no tax would ever apply to this type of transaction. As set forth above, use tax applies to the storage, use, or consumption of property purchased from a retailer for use inside this state. (Rev. & Tax. Code §§ 6201, 6401.) This tax is imposed on the person actually storing, using, or otherwise consuming the property within the state. (Rev. & Tax. Code § 6202.) A retailer engaged in business in this state is required to collect the applicable use tax from the purchaser at the time of the sale of property to be used inside the state. (Rev. & Tax. Code § 6203.)

Since your company's customers own the film when it is delivered to the out-of-state CDROM manufacturer, the delivery of the film to the CD-ROM manufacturer is made on behalf of

Mr. ---

-5-

April 10, 1995
325.0341

your company's customer. Under these facts, it is presumed that the film is purchased by your company's customers for use inside this state if your company knows that its customer is a California resident. (Rev. & Tax. Code § 6247; Reg. 1620(b)(3).) Unless your company rebuts this presumption, your company is required to collect use tax from its customers at the time of the sale of the films. (See Rev. & Tax. Code § 6203.) This presumption can, however, be overcome by a statement in writing from your customer (and retained by your company) that the film is not purchased for use in California or by other evidence satisfactory to this Board that the films were not purchased for storage, use, or other consumption inside this state. (Rev. & Tax. Code § 6247.) Where your company overcomes this presumption, its customers will owe use tax on the films if they are subsequently brought into this state within 90 days after their purchase, unless the films are used or stored outside California one-half or more of the time during the sixmonth period immediately following their entry into this state. (Reg. 1660(b)(3).) "2(b): When we produce films outside California and ship those films to an out of state location where they are then used, is the price we charge the customer for such films subject to the sales tax?" If the films are manufactured outside California and are shipped to a location for use outside this state, title to these films passes, and hence the sale occurs, to your company's customers outside this state and California sales tax does not apply. (See Rev. & Tax. Code §§ 6010.5, 6006(a), 6051; Cal. U. Com. Code § 2401.) Your company may be obligated, however, to collect use tax from its customers as set forth above. "2(c): If a sale of films is non-taxable by 2(a) or (b) above, then what happens if at a later time the customer requests that we forward the films to an address within California? Would we then need to collect sales tax, or would the customer or other consignee be responsible for paying use tax on the value of the films?" We assume that a customer may request the delivery of the films to a California address sometime after the initial sale of the film to the customer and after the use of the film in a printing activity outside this state. If so, your company is not required to report California sales tax provided the sale of the film was not subject to tax for the reasons set forth in our responses to questions 2(a) and 2(b) above. Your company may, however, be required to collect use tax from its customers as set forth in our response to question 2a above. However, if your company is not required to collect use tax from its customer because the customer provides an affidavit as set forth in section 6247, the customer will owe use tax if it is regarded as purchasing the property for use in California. (Rev. & Tax. Code §§ 6201, 6401.) "3) If it turns out that we have been paying sales tax on sales not subject to tax, can we obtain a refund? How far back can we go in

Mr. ---

-6-

April 10, 1995
325.0341

claiming a refund? If our customers reimbursed us for the sales tax, do we have any legal obligation to claim a refund and pay it to them?" If you believe your company paid tax on amounts that are not subject to tax, it may submit a claim for refund to the Board in letter form. (See Rev. & Tax. Code § 6904.) The letter should specify the amount of the claim, the relevant dates, the basis for the claim, and should be accompanied by a copy of this letter. Please note, however, that claims for refunds must be made within three (3) years from the last day of the month following the close of the quarterly period for which the overpayment was made. (Rev. & Tax. Code § 6902(a)(1).) Any such claim should be sent to: Board of Equalization 450 N Street, MIC 39 P.O. Box 942879 Sacramento, CA 94279-0039 ATTN: Audit Review and Refunds Section A refund of overpaid tax would only be granted if your company refunds this amount to those customers who paid it. (Rev. & Tax. Code § 6901.5.) If you have any further questions, please write again. Sincerely,

Warren L. Astleford
Staff Counsel
WLA:plh
---

Enclosure - Reg. 1620
cc: San Jose District Administrator - GH