How did California tax artwork bought under resale certificates and transferred to an affiliate for reproduction?

Plain-English summary

Tax Counsel did not understand all facts in an absent October 19, 1992 request. The client was unidentified, and the response expressly assumed that every transaction occurred in California and that the described Corporation A/B facts were complete. The two corporations were assumed affiliates as that term was used in the Internal Revenue Code; no Code section, entity record or agreement appears.

Corporation B was assumed to buy original artwork under resale certificates. Its purchase agreements conveyed all seller interests, including reproduction and licensing rights. B resold some originals without lease or use beyond retention, demonstration or display. For other art, B temporarily transferred possession to A for reproduction, A returned the art afterward, and A gave B consideration.

Section 6051 imposed retailer sales tax measured by gross receipts. Civil Code section 1656.1 permitted contractual collection of reimbursement, while section 6012 broadly included sale-related receipts except installation charges. Section 6201 supplied the use-tax rule; under section 6094(a), a resale-certificate buyer's first use beyond retention, demonstration or display triggered use tax measured by its purchase price.

California treated that transfer as a lease. Because B had bought the artwork under resale certificates, the lease was a continuing sale and purchase. B had to collect and pay use tax on every form of consideration from A, whether called royalties, licensing fees, or reproduction-rights fees; paid in a lump sum or periodically; based on A's sales; or received after the artwork was returned.

Sections 6006(g), 6010(e), 6006.1 and 6010.1 supported continuing-lease treatment. Use tax was imposed on A as lessee, but regulation 1660(c)(1) required B to collect and pay it when rent was paid and give a receipt. A later retail sale of the original artwork was separately taxable, with no credit or deduction for use tax collected and paid on the prior lease.

The opinion also analyzed a different structure. If B photographed the original and sold the negative to A rather than transferring the artwork, B made taxable use of the resale-acquired artwork measured by its purchase price and also made a taxable sale of the negative. All consideration for the negative sale was taxable regardless of its label, and a later retail sale of the original remained taxable.

Section 6596 made written-advice relief conditional on a written request identifying the taxpayer and disclosing all relevant facts. Because the correspondent supplied neither identity nor complete facts, Counsel classified the letter as general advice about assumptions and expressly denied it section 6596 status.

No request, client identity, corporate or artwork agreement, artwork, resale certificate, physical transfer, reproduction or negative, fee computation, sale, return, tax payment or later outcome appears. Live Annotation 330.3780 publishes both assumed reproduction structures but omits the direct-resale branch, the later original-artwork sale/no-credit rules and section 6596 limitation. It also recasts the PDF's fee “based on sales made by Corporation A” as based on the number of reproductions sold.

Common questions

Did affiliation between the corporations avoid lease tax?

No. The opinion treated the compensated temporary transfer between the assumed affiliates as a lease.

Were reproduction-rights royalties outside taxable rent?

No. Every amount B received under the transaction was included, regardless of label, formula, or payment timing.

Did the agency verify that these transactions actually occurred?

No. Counsel called the response general advice based on numerous assumptions because the request omitted the client identity and complete facts.

What did B acquire from the artists?

Under the assumed purchase agreements, all seller interests in the originals, including reproduction and licensing rights.

What if B simply resold an original without reproducing or leasing it?

The assumptions included original-artwork resale after no use beyond retention, demonstration or display. The letter provides the ordinary retail-sales framework but no actual sale or tax record.

Could tax paid on rent offset tax on a later artwork sale?

No. The opinion allowed no credit or deduction against the later retail sale.

What changed if B sent a negative instead of the original artwork?

B's use of the original to create the negative triggered use tax on the original's purchase price, and selling the negative was separately subject to sales tax.

Could part of the negative price be excluded as an intangible reproduction right?

No. The response included all consideration regardless of label and allowed no licensing or reproduction-rights exclusion.

Could the unidentified client rely on section 6596?

No. The letter says the missing identity and relevant facts prevented incorrect-written-advice relief.

What does the live annotation omit or alter?

It omits the direct-resale facts, later original sale/no-credit rules and reliance limitation. It describes one variable fee as based on reproductions sold, while the PDF says sales made by A.

Citations and references

• Revenue and Taxation Code section 6051; Civil Code section 1656.1 — sales tax and contractual reimbursement
• Revenue and Taxation Code section 6012 — gross receipts, with installation charges excluded
• Revenue and Taxation Code sections 6201 and 6094(a) — taxable use of resale-certificate property
• Revenue and Taxation Code sections 6006(g), 6010(e), 6006.1 and 6010.1 — continuing artwork lease
• Regulation 1660(c)(1) — lessor collection/payment and receipt duties
• Unnumbered Internal Revenue Code affiliate concept — assumed corporation relationship
• Revenue and Taxation Code section 6596 — incorrect-written-advice relief unavailable without taxpayer identity and all relevant facts
• Live Annotation 330.3780 — both reproduction structures, with the PDF limitations and later-sale rules omitted
• Request, client/transactions, agreements, property, certificates, consideration, sales, returns, taxes and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3780
• Original supporting opinion: 330.3780 PDF

Original ruling text

330.3780

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-8208

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

January 20, 1993

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. S--- R. M--M--- & S---, Inc.
XXXX West --- -----, Texas XXXXX
Dear Mr. M---:
This is in response to your letter to Ms. Phetteplace dated October 19, 1992. Since we do not understand all the facts in your letter, the discussion in this letter is based upon numerous assumptions. The first assumption is that all of the transactions occur in California. The second assumption is that following are the pertinent facts: Corporations A and B are affiliated corporations as that term is used under the Internal Revenue Code. Corporation B purchases original artwork and issues resale certificates to the sellers. Under the purchase agreements, the sellers convey to Corporation B all of the sellers' interests in the artwork, including reproduction and licensing rights. Corporation B resells some of the original artwork without leasing or making any use of the artwork other than retention, demonstration, or display before resale. With respect to other artwork, Corporation B transfers possession of the artwork to Corporation A which uses the artwork to make reproductions. After Corporation A is finished using the artwork for making reproductions, it returns the artwork to Corporation B. Corporation A gives Corporation B consideration for this transaction. Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. Although the sales tax is imposed upon the retailer, the retailer may collect sales tax reimbursement (usually itemized on the invoice as "sales tax") from the purchaser if the contract of sale so provides. Civ. Code § 1656.1. "Gross receipts" is a very broad term and includes all receipts relating to a sale of tangible personal property, except installation charges. Rev. & Tax. Code § 6012.

Mr. S--- R. M---

-2-

January 20, 1993
330.3780

Revenue and Taxation Code section 6201 imposes an excise tax, commonly referred to as the use tax, on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer for storage, use, or other consumption in this state. The use tax complements the sales tax and is most frequently imposed upon in-state leases and out-of-state purchases of property used in California. The use tax is also imposed upon a purchaser who gives a resale certificate and then uses the property for purposes other than retention, demonstration, or display. In that case, the tax liability arises at the time the purchaser first makes a taxable use of the property, and the use tax is measured by the sales price of the property to the purchaser. Rev. & Tax. Code § 6094(a). Unless tangible personal property is leased in substantially the same form as acquired by the lessor and the lessor has paid sales tax reimbursement or use tax measured by the purchase price of the property, a lease of tangible personal property is a continuing sale and purchase, and the lessor must collect and pay use tax measured by the rental payments. Rev. & Tax. Code
§§ 6006(g), 6010(e), 6006.1, and 6010.1. Although the use tax is imposed on the lessee, the lessor must collect the tax from the lessee at the time rentals are paid by the lessee and give the lessee a receipt. Sales and Use Tax Regulation 1660(c)(1). When Corporation B transfers the artwork to Corporation A, which uses the artwork to make reproductions, Corporation B is leasing the artwork to Corporation A. The lease is a continuing sale and purchase since Corporation B issued a resale certificate when it purchased the property, and Corporation B must collect and pay use tax measured by the rental receipts to the State of California. The rental receipts include all consideration Corporation B receives from Corporation A under the transaction, whether such amounts are referred to as royalties or licensing fees for reproduction rights or whether the consideration is paid in a lump sum or periodically, or is based on sales made by Corporation A, or is paid after Corporation A has returned the artwork. If Corporation B thereafter sells the artwork at retail, the sale is taxable. No credit or deduction is allowed based on the use tax collected and paid by Corporation B on the lease to Corporation A. If Corporation B takes a picture of the original artwork and sells the negative to Corporation A, which uses the negative to make reproductions, rather than transferring possession of the artwork to Corporation A, Corporation B has made a taxable use of the artwork and must pay use tax measured by its purchase price of the artwork. In addition, Corporation B has made a sale of the negative to Corporation A and must pay sales tax on the sale. The sales price subject to tax includes all consideration received from Corporation A no matter what label the parties give to such amounts in their agreement. (E.g., royalties, licensing fees, fees for reproduction rights etc.) There is no exclusion or deduction for any amount which the parties regard as payment for reproduction rights or licensing. Finally, if Corporation B subsequently sells the artwork in a retail transaction, the sale is subject to sales tax.

Mr. S--- R. M---

-3-

January 20, 1993
330.3780

Revenue and Taxation Code section 6596 provides the only basis for relief from tax if a taxpayer relies on incorrect written advice from the board. The primary conditions to qualify are that the request for opinion must be in writing and must disclose all relevant facts, including the identity of the taxpayer. Since you have not identified your client or disclosed all relevant facts, this opinion does not come within the provisions of section 6596 but rather is simply general advice regarding a set of assumed facts. Sincerely,

Elizabeth Abreu
Tax Counsel

EA:cl