Were design royalties taxable when an artist temporarily sent original artwork or slides to product companies while retaining copyright?

Plain-English summary

Cindy Thomas of the Return Review Unit made a May 18, 1989 telephone request for a further legal opinion on whether sales tax was owed on a redacted artist's royalties. The source preserves no call notes, earlier opinion, return under review or later adjustment.

The artist received royalties from companies using her designs on posters, tee shirts and other products while she kept copyright. She sent either original artwork or a slide. With an original, the company photographed and returned it, then later created a transparency from its slide. With the artist's slide, the company created a transparency directly and returned the slide.

Board Legal staff member Stella Levy treated temporary possession and return of each physical item as a lease under section 6006.3. Retained copyright did not prevent a lease of the tangible carrier.

Original artwork was not leased in substantially the same form as property the artist acquired. Its transfer was a taxable lease and the royalties received measured the tax. The source does not identify raw inputs, explain their acquisition tax or separate any intangible-rights amount.

Slides received the conditional opposite result. If the artist had paid sales-tax reimbursement due on film processing that produced the slide, its temporary transfer was a nontaxable lease of property in substantially the same form as acquired. No processing invoice, tax proof or evidence that the slides stayed unchanged appears.

Live 330.2770 states both branches and assumption but omits further opinion posture, missing earlier advice and absent evidence. No agreements, art/slides, copyright records, transfer/return proof, reproduction materials, royalty amounts, sales/use-tax return, review adjustment, assessment, refund claim, appeal or later outcome is supplied.

What this means for you

Separate temporary possession of physical art or media from retained copyright and other intangible rights. Preserve what item was delivered, who made it, whether it was returned unchanged, its acquisition/processing tax, reproduction steps and royalty terms.

Common questions

Did retained copyright prevent a taxable lease?

No. The memorandum separately treated temporary possession of physical artwork or a slide as a tangible-property lease.

Why did original artwork produce taxable rent?

Counsel said the artist had not acquired the leased original in substantially the same form. Royalties received were the tax measure.

Why could slide transfer be nontaxable?

Only on the assumption that the artist paid sales-tax reimbursement due on film processing and transferred the slide in substantially the same form as acquired.

Did source decide purely digital delivery?

No. Both branches involved physical original artwork or slides sent to companies and returned.

What did further legal opinion refer to?

Source does not say. It supplies neither prior opinion nor May 18 request notes.

Was Return Review's final action recorded?

No. The memorandum ends after its legal conclusion and gives no adjustment or proceeding outcome.

Citations and references

• Section 6006.3 — temporary physical transfer and return as lease
• Sections 6006(g)(5), 6010(e)(5); Regulation 1660(c)(2) — tax-paid substantially-same-form lease rule
• May 18 telephone request and implied earlier opinion — absent
• Agreements, rights/ownership proof, art/slides, processing tax, transfers/returns, reproductions, royalties and returns — absent
• Live Annotation 330.2770 — original-art and conditional slide branches
• June 2 internal memorandum — review action and later outcome absent

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2770
• Original supporting opinion: 330.2770 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Ms. Cindy Thomas
Return Review Unit

From:

Stella Levy
Legal

330.2770

Date:

June 2, 1989

Subject:

This is in response to your May 18, 1989 telephone request for a further legal opinion as to whether sales tax is owing on the royalties received by ---.
--- is an artist who receives royalties from companies which use her designs on posters, tee shirts, and other products. She retains the copyright to her designs. The designs are transferred to the companies either as an original artwork or as a slide. In the case of original artwork, it is sent to the company which photographs it, then returns the artwork to ---. The company will later create a transparency from the slide it created. In the case of slides, they are sent to the company which creates transparencies directly from the slides, then returns them to --. The transfer of possession of tangible personal property (slides and original artwork in this case) which is then returned to its owner, constitutes a lease of the property. (Rev. & Tax. Code § 6006.3.) Generally, a lease is taxable unless it is a lease of tangible personal property “in substantially the same form as acquired by a transferor, as to which the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property.” (Rev. & Tax. Code §§ 6006(g)(5), 6010(e)(5), Sales & Use Tax Regulation 1660(c)(2).) Under the above cited statutes, ---'s transfer of original artwork is a taxable lease with the royalties received being the measure of tax. A lease of original artwork is not a lease of property in substantially the same form as acquired by the lessor. Her transfer of slides, however, is not a taxable transaction, assuming that she previously paid any sales tax reimbursement due on her purchase of the film processing which produced the slide. In such case, the temporary transfer of the slides to the manufacturer constitutes a lease of property in substantially the same form as acquired by the lessor. SCL/smt:1398C