Did a motion-picture release print become a release print only after mounting on reels, and was the mounting house's initial winding charge taxable?

Plain-English summary

A 1990 Principal Tax Auditor memorandum considered a redacted film laboratory's manufacture of 16 mm release prints for a California rights owner. The owner sold broadcast rights and the prints to a foreign distributor, while another company picked up and prepared the prints and sent them to England by common carrier.

The memorandum said the laboratory's transfer appeared to be an exempt sale for resale and the owner's transfer appeared to be an exempt export sale, assuming the owner and distributor were separate legal entities and the owner made no intervening use. If they were not separate, the laboratory's transfer would still be an exempt export sale provided the shipping company did nothing beyond preparing and shipping the prints.

The memorandum also treated the shipping company as a forwarding agent because it routinely performed overseas shipping services. Preparing property or arranging shipment did not need to be its primary business, and the lack of a special license or advertising did not control.

A release print was a high-quality motion-picture copy used for public exhibition whether it was wound on spools or reels. Mounting on reels was not required to create release-print status, but the mounting house's initial winding on reels was taxable fabrication labor.

The memorandum also allowed excess tax reimbursement to offset the taxpayer's tax on identifiable raw stock used in the same qualified-production-service transaction, provided possession of that property passed to the customer.

A 1996 Legal Division review said it had reviewed the 1990 memorandum and agreed with its conclusion, but it reproduced only the release-print definition and taxable initial-winding result. The PDF does not say that Legal Division adopted the memorandum's separate resale, export, forwarding-agent, or reimbursement-offset analyses.

Source and live-annotation limits

The 1990 memorandum describes the facts as staff understandings, assumptions, and explanations. It does not include the June 11, 1990 request, identify the redacted companies or television series, or supply an entity-separateness record, rights or negative, broadcast-rights sale, laboratory, shipping or common-carrier contract, release print, use record, export or delivery record, raw-stock record, reimbursement record, tax return, audit workpaper, completed transaction, assessment, refund, or later outcome.

The 1996 review identifies its author and recipient but supplies no underlying file or review analysis. The live annotation preserves only the release-print definition, spool-or-reel result, initial-winding rule, and the two source dates. It omits the parties, television and export facts, assumptions, resale analysis, alternative export route, forwarding-agent analysis, reimbursement-offset analysis, cited regulations, missing records, and later-outcome gap.

What this means for you

Film laboratories, mounting houses, and tax professionals

Do not base release-print status on the reel or spool. Separately document who owns and uses the prints, export delivery, forwarding-agent duties, mounting labor, transferred raw stock, and any same-transaction reimbursement offset. The 1996 review does not establish that Legal Division adopted every conclusion in the 1990 memorandum.

Common questions

Q: Did film have to be on reels to become a release print?

A: No.

Q: Was initial winding on reels taxable?

A: Yes, as fabrication labor.

Q: Did a shipper need forwarding to be its primary business?

A: The 1990 memorandum said no. It treated routine overseas preparation or shipping as sufficient on the facts described.

Q: Did the memorandum treat the laboratory's transfer as a resale transaction?

A: It said the transfer appeared exempt for resale, assuming separate legal entities and no intervening use by the rights owner.

Q: When could excess tax reimbursement offset raw-stock tax?

A: The 1990 memorandum required the liability and reimbursement to arise from the same transaction, the raw stock to be identifiable to that transaction, and possession of the property to pass to the customer.

Citations and references

• California Sales and Use Tax Regulation 1620(a)(3)(B)(2)
• California Sales and Use Tax Regulation 1700(b)(4)
• June 11, 1990 district memorandum — described but not included
• Entity, rights, negative, print, contract, shipment, raw-stock, reimbursement, and tax records — described or assumed but not documented

Verbatim support

From the official combined memorandum and review:

The sale of such a print is subject to tax, unless otherwise exempt, regardless of whether it is wound on spools or reels. Further, the initial winding of a release print on “reels” by a mounting house constitutes taxable fabrication labor.

A person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment is a forwarding agent regardless of whether that is their primary business.

Regulation 1700(b)(4) provides that excess tax reimbursement may be offset against a tax liability of the taxpayer on the same transaction if possession of the property upon which the taxpayer’s liability is based is transferred, either temporarily or permanently, to the customer.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 375.0886
• Original supporting opinion: 375.0886 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Jack A. Infranca
Van Nuys – District Principal Auditor

From:

Glenn A. Bystrom
Principal Tax Auditor

Subject:

F--- I---, Inc.

375.0886

Date:

September 10, 1990

SR -- XX-XXXXXX

In a memorandum dated June 11, 1990, from Senior Tax Auditor Norman W. Rice of your staff, my advice was requested regarding the sale of release prints by F--- I---, Inc. (F---) to L--- G--L--- P--- (L---). It is my understanding that L---, an unpermitized California firm, owns the rights and negatives to the television series, “--- ---”. L--- sold their broadcast rights to G--- Entertainment, (G---) a foreign distributor. L--- contracted with F---, a film processing laboratory, to manufacture release prints on 16 mm film which could be used by G--- for exhibition purposes to the public over television in England. L--- also contracted with D---, Inc., (D---) to pick up the release prints from F---, prepare the prints for shipment, and ship them to G--- in England via a common carrier. It is also my understanding that D---, a videotape duplicating laboratory, did nothing more with the prints. You ask whether F---’s charge for manufacturing the release prints is exempt as a sale for export. L---’s contract with G--- obviously was for the sale of both broadcasting rights and tangible personal property (release prints). Consequently, F---’s sale of the release prints to L--- appears to be an exempt sale for resale since L--- resold the prints to G--- presumably without making any use of them. Further, L---’s sale of the prints to G--- appears to be an exempt sale for export. Therefore, assuming that L--- and G--- are separate legal entities, the sale by F--- to L--- is an exempt sale for resale and the question of whether that sale is an exempt sale for export is moot. You also asked whether D---, Inc., qualifies as a “Forwarding Agent” per Regulation 1620(a)(3)(B)(2) by “regularly engaging in the business of preparing property for shipment or

Mr. Jack A. Infranca

-2-

September 10, 1990
375.0886

arranging for its shipment” even though it is not licensed as such, nor does it advertise as such. You also explained that D--- routinely performs overseas shipping services for its customers. A person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment is a forwarding agent regardless of whether that is their primary business. Based upon your description of D---’ activities, it appears that D--- would qualify as a forwarding agent. (Consequently, if L--- and G--- were not separate legal entities, the sale by F--- to L--- would still be exempt as an export sale provided D--- did nothing more with the prints other than prepare them for shipment and so ship them.) You also asked the following questions which relate to the sales of release prints. Question Does the placing of the motion picture film on “reels” by a “mounting house” constitute a step in the “manufacture of release prints,” and hence the sale by F--- of the film on “spools” is not a release print but is instead an “intermediate”, and hence taxable at cost to F--- as a qualified production service? (i.e., at what stage does a release print become a “release print” by definition?) Response A release print is a print (copy of a motion picture film) produced on high qualify stock and used for exhibition to the public. The sale of such a print is subject to tax, unless otherwise exempt, regardless of whether it is wound on spools or reels. Further, the initial winding of a release print on “reels” by a mounting house constitutes taxable fabrication labor. Question If the placing of the film on reels IS required to make the film a “release print”, would the significance of whether the agent of the buyer or the seller of the film performed this spooling service to prepare the film for exhibition be “crucial”? Response Since the placing of the film on reels is not required to make the film a “release print” the question is moot.

Mr. Jack A. Infranca

-3-

September 10, 1990
375.0886

Question
In audits of motion picture and television industry permittees, can we allow for offsets of a taxpayer’s own tax liability (i.e. cost of raw stock used on the performance of qualified production services) against the tax reimbursement collected and reported from the customer at retail as per Regulation 1700(b)(4)? Response Regulation 1700(b)(4) provides that excess tax reimbursement may be offset against a tax liability of the taxpayer on the same transaction if possession of the property upon which the taxpayer’s liability is based is transferred, either temporarily or permanently, to the customer. Therefore, a tax liability on the cost of raw stock which can be identified to a particular qualified production service may be offset against any excess tax reimbursement collected and reported on that particular transaction provided the property is transferred to the customer.

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District Principal Auditors

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum

To:

Mr. Glenn Bystrom

From:

Gary Jugum

Subject:

Non-Attorney Opinions

375.0886

Date:

May 29, 1996

I have reviewed your memorandum of September 10, 1990 to Jack Infranca. We are in agreement with his conclusion, as follows:

Mounting Film on Reels. A release print is a copy of a motion picture film produced on high quality stock and used for exhibition to the public. It is a release print regardless of whether it is wound on spool or reels. However, the initial winding of a release print on reels by a mounting house is taxable fabrication labor. 9/10/90.

Gary Jugum