When were a special-effects provider's custom props, operator-controlled effects, destroyed breakaway props, and reusable breakaway props taxable sales, services, or leases?

Plain-English summary

A special-effects company built custom boat sections, miniatures, paintings, and breakaway bottles that became the production company's property. California treated those transfers as taxable retail sales even though the buyer used them to make a commercial.

When the provider retained title and possession of equipment and its employees operated bullet-hit, pyrotechnic, wind, rain, fire, smoke, or fog effects, it performed a service and consumed the equipment.

A breakaway prop placed on set and destroyed by an actor or other nonemployee was a taxable sale. A reusable breakaway prop temporarily transferred for operation or control by the customer or its employees was a lease, with use tax imposed on the lessee's use and collected by the lessor.

The motion-picture rule then exempting transfer of a qualifying commercial did not independently exempt the provider's prop sales or leases.

Source and live-annotation limits

The letter does not reproduce the May 14, 1986 request, client drawings or concepts, or the article about rejected Regulation 1529 amendments. It does not identify the provider, commercial client, feature film, director, or proposed-amendment source and supplies no custom prop, title or possession record, equipment, operator or employee record, actor, breakaway destruction or reuse, contract, charge, invoice, tax reimbursement, lease, tax return, audit, completed transaction, or later outcome. The extraction prints Regulation 1660 as “I 660”; the official live annotation supplies the numeric form.

The live annotation preserves the employee-operated effects service/consumer rule, nonemployee-destroyed breakaway sale, and reusable-breakaway lease. It omits the May 14 request, custom boat, miniature, painting and bottle sales, client title, tax-reimbursement contract point, section 6007 and subcontract analysis, provider possession condition, lessor collection duty, Regulation 1529 and rejected-amendment discussion, missing records, extraction defect, and later-outcome gap.

What this means for you

Special-effects companies and tax professionals

Track title, possession, who operates each effect, who destroys a breakaway item, whether a prop is reusable, and whether the customer controls it temporarily.

Common questions

Q: Were custom props sold to a production company taxable?

A: Yes.

Q: Were effects operated by the provider's employees taxable sales?

A: No. The provider performed a service and consumed the equipment.

Q: Was a reusable prop temporarily controlled by the customer a sale?

A: It was treated as a lease.

Citations and references

• California Revenue and Taxation Code § 6007
• California Sales and Use Tax Regulations 1529 and 1660(a), (c)(1)
• May 14, 1986 request, client drawings and concepts, contracts, custom props, effects equipment, breakaway use, and article on rejected Regulation 1529 amendments — described or referenced but not included

Verbatim support

From the official June 17, 1986 letter:

If you retain title to and possession of: and you or your employees operate, the equipment which causes the bullet hit effects, pyrotechnics, and special effect elements such as the wind, rain, fire, smoke, and fog, you do perform a service for the client and are the consumer of the equipment you furnish.

If you place a break-away prop on a set, and the actor or other person who is not your employee destroys the break-away prop, it is our opinion that you have made a sale of the break-away prop.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 375.0290
• Original supporting opinion: 375.0290 PDF

Original ruling text

375.0290

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

(916) 445-6450

June 17, 1986

Dear --This is in reply to your May 14, 1986 letter regarding the application of sales tax to your charges under the facts you provided for the following situation: "The situation that exists where I feel that I am responsible for charging 6.5% sales tax on the labor is where I build the prop for a production company and sell it to them. "For example, currently I am working on a commercial for --- --- . They had come to me originally with drawing and concepts for items that they wanted me to contract and produce. Those items consisted of a small section of a boat hull, a miniature boat, a large painting of a sky, and some break-away champagne bottles. All of these items were designed and built by my company and ultimately sold to --- ---. They will remain in --- as their property." We first note that the sales tax is imposed directly upon the retailer for the privilege of selling tangible personal property at retail in this state. Therefore, whether or not you charge your clients sales tax reimbursement is a matter of contract between you and your clients. We agree with your conclusion that sales tax applies to the transactions you described in this situation. You make a retail sale of tangible personal property to ---. You asked that we consider that you merely subcontract with --- --- --- who is actually supplying the ultimate product -- the commercial. We considered such fact and conclude, nonetheless, that your sale of the props to --- --- is a retail sale to which sales tax applies, because your sale is "for any purpose other than resale in the regular course of business in the form of tangible personal property." See section 6007, Revenue and Taxation Code. "The second situation, which I do not feel I should be responsible for, is the bulk of my work. Working on a feature film, my company will supply a service, but not actually any props. For example: I am currently working on a film called --- -- being directed by --- ---. On this film there are many action sequences which

require bullet hit effects, pyrotechnics, break-away props and special effect elements such as, wind, rain, fire, smoke and fog." If you retain title to and possession of: and you or your employees operate, the equipment which causes the bullet hit effects, pyrotechnics, and special effect elements such as the wind, rain, fire, smoke, and fog, you do perform a service for the client and are the consumer of the equipment you furnish. Tax applies to the sale to you of the equipment. If you place a break-away prop on a set, and the actor or other person who is not your employee destroys the break-away prop, it is our opinion that you have made a sale of the break-away prop. Tax applies to your charge. If you make a temporary transfer of a reuseable break-away prop, we believe that you make a lease of the prop. See Sales and Use Tax Regulation I 660(a) which includes in the definition of "lease" a contract under which a person secures for a consideration the temporary use of tangible personal property which is operated by, or under the direction and control of, the person or his employees. In such case, the applicable tax is a use tax upon the use in this state of the property by the lessee. You, as the lessor, are required to collect the use tax from the lessee (see Reg. I 660(c)(1)). You asked whether the recent article in the --- --- --- regarding the recent rejection of amendments to Sales and Use Tax Regulation 1529 relieves you from the responsibility for payment of sales tax. No. Presently, Regulation 1529 provides that, when a company such as --transfers title to a commercial which qualifies as a motion picture production, tax does not apply to the transfer. The proposed amendments would have imposed the sales tax on such transfers of commercials. In other words, the commercials would have no longer qualified as "productions" as defined in the regulation. We hope this answers your questions; however, if you need further information, feel free to write again.

Very truly yours,

R. L. Dick
Tax Counsel

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