How did California tax limited rights to use and reproduce a stock photograph when the client had to return the photo?

Plain-English summary

An office manager's March 2, 1993 letter described a stock-photography agency licensing photographs for publications, advertising, brochures, textbooks and other projects. Clients bought limited use rights and returned the photograph after the project; the photographer retained copyright and ownership. The complete request, license and photograph are absent.

Senior Tax Counsel Ronald L. Dick treated the arrangement as a lease of the physical photograph. The applicable tax was use tax on the lessee's California use. The agency had to collect it from the lessee and give a receipt under Regulation 1686. Regulation 1660 was said to be enclosed, but the enclosure is not in the official PDF.

A client could not issue a resale certificate merely because it reproduced the image in final property it sold. The client used the photograph to make a reproduction rather than re-leasing the photograph itself. No license, finished publication, invoice, resale certificate, possession/use or return evidence appears.

Royalties were included in taxable lease sales price. Agency was told to report them on line 1 of sales and use tax return when received. Cited Annotation 295.0570's current live text concerns artist transferring original prototypes used to manufacture replicas for future percentage royalties; it likewise says royalties are reported in quarter amount becomes definite and prints citation Burnet v. Logan, 283 U.S. 404 [1930]. Exact 295.0570 backup PDF returned 404 by both permitted methods, so underlying opinion, facts and procedural history are unavailable and not reconstructed here.

A different answer applied when the agency sent photographs on spec to another stock-photo agency. Because the second agency made the taxable lease to the final client, the first agency could accept its resale certificate. The source supplies no interagency agreement, final lease, certificate or tax reporting.

Live 330.2765 publishes only physical-photo lease, California-use tax and royalty-in-price result. It omits client-reproduction denial, line-1/timing instruction, on spec resale branch, absent enclosure and missing-record limits. No audit, assessment, refund claim, appeal or later outcome is supplied.

What this means for you

Distinguish client's use of a photograph to create another product from an intermediary's actual re-lease of that photograph. Preserve license, possession/return, copyright and ownership terms, California use, royalty timing, certificates, invoices and returns. Do not assume a digital-photo transaction follows this physical-photo letter.

Common questions

Did retained copyright and required return prevent tax?

No. Those facts supported classification as lease rather than outright sale.

Could a publisher give a resale certificate because its publication was sold?

No. Merely reproducing the image in property sold to customers did not make the photo lease a purchase for resale.

What tax and collection duty did letter identify?

Use tax on the lessee's California use; the agency had to collect tax and provide a receipt.

When were royalties reported?

On line 1 when the agency received them, as part of the taxable lease price.

Could another stock-photo agency issue resale certificate?

Yes, when it—not the original agency's end user—made the taxable lease to the final client.

Is cited 295.0570 backup opinion available?

No at reviewed exact official path. Current live annotation supplies royalty rule and case citation, but not underlying opinion.

May current digital-image licensor rely on this answer?

No. This source describes physical photograph returned after project, and its letter-specific result is not binding on another transaction.

Citations and references

• Regulation 1660 — physical-property lease rule; listed enclosure absent
• Regulation 1686 — collection and receipt duty for lessee use tax
• Annotation 295.0570 — royalty timing; live text only, exact backup PDF unavailable
• March 2 request — quoted description supplied, complete request/attachments absent
• Licenses, photos, projects, use, invoices, reproductions, returns, royalties, certificates and returns — absent
• Live Annotation 330.2765 — lease, California use and royalty-in-price branch only
• April 19 counsel letter — later transaction/proceeding outcome absent

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2765
• Original supporting opinion: 330.2765 PDF
• Cited live authority and unavailable backup: Annotation 295.0570 and 295.0570 PDF path

Original ruling text

330.2765

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

April 19, 1993

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Ms. L--- H--Office Manager
D--- M--XXXX --- ----- ---, CA XXXXX
SR -- XX-XXXXXX
Dear Ms. H---:
This is in reply to your March 2, 1993 letter regarding the application of sales and use tax to your charges for licensing your photographs under the following facts you described: "We are a stock photography agency engaged in the business of licensing the use of our photos in various publications, advertisements, brochures, textbooks, etc. The client does not buy the photograph from us. Instead, they purchase limited rights to use the photograph and then return it to us when the project is complete. The photographer retains the copyright and ownership of the photograph. "We charge instate clients state sales tax unless their projects are for resale. In these cases we have resale certificates on the premises." Under the facts you provide, you make a lease of the photograph to the client. For your information, enclosed is a copy of Sales and Use Tax Regulation 1660, Leases of Tangible Personal Property-In General. The applicable tax to your leases of photographs is the use tax on the use in this state of the property by the lessee. You are required to collect the tax from the lessee and give the lessee a receipt as provided in Sales and Use Tax Regulation 1686, Receipts For Tax Paid To Retailers.

Ms. L--- H---

-2-

April 19, 1993
330.2765

Your clients should not issue a resale certificate to you for the lease of a photograph which the client will merely use to reproduce the image in property sold by the client. This is true even if the client will sell its final product to its customer. You asked how you should report royalty income on your sales and use tax return. The amount you receive as royalties are includible in the taxable sales price of your lease. You should report the royalties on line 1 of your sales and use tax return and report the royalties at the time you receive them. (Bus. Taxes Law Guide Annot. 295.0570.) You also noted that you send your photographs to another stock photo agency, "on spec." You asked if you were correct in accepting a resale certificate from the other agency. Yes, the other agency makes the taxable lease, and you may accept a resale certificate from that agency. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:sr
Enc.