Was a film suitable for exhibition nontaxable when sold as a bid print for market evaluation, and what happened if it was later exhibited or broadcast?

Plain-English summary

A distributor could order a small number of film prints to evaluate market potential or seek theater commitments before ordering release prints. Some were made from the final edited motion picture and were physically suitable for exhibition.

California said exclusive use for market evaluation made the print a nontaxable bid print and the product of qualified production services, even if its quality otherwise fit the release-print definition.

Ultimate use controlled. If the purchaser later exhibited or broadcast the same print, the exclusion was defeated and the seller became liable for sales tax measured by the print's selling price.

Because sellers might not know or might be misled about later use, the source suggested consulting counsel about a contract clause requiring purchaser reimbursement for tax later found due. The Board itself could not enforce that private agreement.

Source and live-annotation limits

The PDF does not reproduce the September 4, 1990 request or identify the requester, distributor, print producer, purchaser, theater chains, or motion picture. It supplies no print, order, intended- or ultimate-use certification, exhibition or broadcast record, selling price, contract, reimbursement clause, invoice, tax return, audit, assessment, completed transaction, civil enforcement, or later outcome. Its first item is an undated Gary Jugum review addressed to Glenn Bystrom and agreeing with the October 1 memorandum; it does not identify a May 29, 1996 review or action.

The live annotation preserves the exclusive-evaluation rule, later exhibition or broadcast consequence, seller liability, and contract-reimbursement suggestion. It omits the September 4 request, distribution and theater-commitment facts, full Regulation 1529 definitions and analysis, selling-price measure, customer-misleading risk, Board nonenforcement and counsel warning, internal-review provenance, missing records, and later-outcome gap. It prints October 1, 1990 and May 29, 1996; only the first date appears in the PDF.

What this means for you

Print sellers, distributors, and tax professionals

Document the print's exclusive evaluation purpose and monitor later use when possible. Consider transaction-specific contract protection for prints that are exhibition quality but sold for market testing.

Common questions

Q: Could an exhibition-quality print still be a nontaxable bid print?

A: Yes, if used solely to evaluate market potential.

Q: What if it was later exhibited or broadcast?

A: The exclusion was lost and the seller became liable for tax.

Q: Could the Board enforce a purchaser reimbursement clause?

A: No. It was a private civil arrangement.

Citations and references

• California Sales and Use Tax Regulation 1529
• September 4, 1990 request, distributor orders, bid and release prints, customer representations, ultimate-use evidence, and sales contracts — described or referenced but not included
• Gary Jugum's undated internal review of Glenn Bystrom's October 1, 1990 memorandum — included without a separate approval date

Verbatim support

From the official October 1, 1990 letter and undated review:

As you can see, whether the sale of such a film is subject to tax depends upon its ultimate use.

While the Board has no authority to enforce such a contractual agreement, this could provide you with protection under civil law.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 375.0735
• Original supporting opinion: 375.0735 PDF

Original ruling text

375.0735

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

To

Mr. Glenn Bystrom

From

Gary Jugum

Subject

Non-Attorney Opinions

I have reviewed your memorandum of October 1, 1990 to --- --- --We are in agreement with his conclusion, as follows: Motion Pictures - "Bid Prints" used exclusively to evaluate market potential are within the definition of qualified production services and tax does not apply to charges for them. However, if the bid print is subsequently used for exhibition or broadcast purposes, the exclusion from taxation is negated and the seller is liable for sales tax on the transaction. Sellers of prints which may be used as bid prints or as. release prints may find it desirable to amend their contracts to provide for reimbursement of any tax which may subsequently be found to be due. 10/l/90

STATE OF CALIFORNIA

375.0735

STATE BOARD OF EQUALIZATION

(916) 445-0387

October 1, 1990

Dear
This is in response to your letter dated September 4, 1990 1n which you requested advice regarding "Bid Prints" and "Release Prints". You gave an example whereby a distributor rather than placing an order for-a large quantity of "release prints" will instead place an order for a limited number of "bid prints". The prints will be used to evaluate market potential, or to solicit firm commitments from theatre chains. Often these prints are made from the final edited version of the motion picture and after use as "bid prints" are used as release prints. You ask whether such prints which are ordered as "bid prints" and initially used as "bid prints" but fit the definition of a "release print" and are subsequently used as "release prints" are subject to tax. Sales and Use Tax Regulation 1529 defines a "release print" as a copy of a qualified motion picture complete in all respects, which is of a quality suitable for exhibition. The regulation further provides that the sale of a release print to a person for exhibition or broadcast is a retail sale subject to sales tax. Regulation 1529 defines a "bid print" as an interim edited preview print used for evaluating market potential. Bid prints are classified as qualified· production services, the charges for which are excluded from the definition of a "sale" and are therefore not subject to tax. Generally the sale of "release prints" is subject to tax. However, the" sale of a film which meets the definition of a release print (of a quality suitable for exhibition) could nevertheless be exempt from tax if the film is used solely for evaluating market potential and not for exhibition or broadcast. In such a case, the film would qualify as a bid print and would be excluded from the definition of a sale. As you can see, whether the sale of such a film is subject to tax depends upon its ultimate use. The exclusion applies only to qualified production services. Film which is used for evaluating market potential is a qualified production service. However, film which is used for exhibition or broadcast (either initially or ultimately) is not a qualified production service and therefore does

not qualify for the exclusion. The sale of "bid prints" is excluded from tax under the presumption that they will be used solely for the purpose of evaluating market potential and therefore are the product of qualified production services. However, if such prints are used for other purposes (exhibition or broadcast) the exclusion is negated. If the exclusion is negated, the seller becomes liable for the sales tax measured by the selling price of the prints to the purchaser. In other words, if a customer orders a "bid print" which is subsequently used for exhibition purposes, the sale does not qualify for the exclusion and the seller is liable for the sales tax on the transaction. I realize a seller may not know the ultimate use of such a print when it is sold, or could be misled by the purchaser. Therefore, you may wish to add some language to your contracts for nontaxable sales of bid prints (which are of a quality suitable for exhibition) to provide that the purchaser will reimburse you for any taxes which are later found to be due on these claimed nontaxable transactions. While the Board has no authority to enforce such a contractual agreement, this could provide you with protection under civil law. You should consult with your legal representatives before making any changes to your sales agreements. I hope this information is helpful. If you have any questions, please let me know.

Sincerely

Glenn A. Bystrom
Principal Tax Auditor

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Hollywood Compliance
Mr. Ron Dick