Which video-production charges did California treat as nontaxable services, taxable property, or taxable rentals under proposed Regulation 1529?

Plain-English summary

California analyzed an industrial-video producer's transactions on the assumption that every production was a qualified motion picture under proposed Regulation 1529.

Blank video or audio tape bought for the producer's own shooting or editing was taxable. A post-production house's transfer of tape it recorded or edited for the production, computer-generated graphics, intermediate-use dubs, online editing, cinematography, retained-equipment filming, storyboards, stock film, and qualifying technological modifications were nontaxable production services.

Equipment rented to the producer was generally taxable unless it was tax-paid property leased in substantially the same form as acquired. Props and wardrobes were taxable when sold and generally taxable when leased, subject to that same tax-paid-property rule. Still photographs and ordinary paintings, models, or artwork also were taxable, except qualifying items transferred with production services and used to film special effects, titles, or credits.

For separately invoiced studio space, lights, telephone, and a studio manager—with the studio supplying no sets, props, or wardrobe—the letter treated only the light rental as taxable, again subject to the tax-paid-property exception. It could not conclusively classify built sets or a semi-permanent western-town façade without more facts; a real-property façade would be nontaxable, while tangible property included with a permanent-set rental required the studio-facilities rule.

Grips, gaffers, drivers, and makeup artists provided nontaxable services because they did not fabricate tangible personal property. Makeup supplies sold without application were taxable. The producer's charge for creating a qualified motion picture was nontaxable, but release prints and dubs sold to the client were taxable. A multi-image slide show was not a qualified motion picture, and the producer's charge was taxable, with resale treatment limited to film and processing actually sold to the client.

The opinion did not conclusively classify every set transaction. It requested more facts for a semi-permanent set and referred to the construction-contractor and studio-facilities rules.

Source and live-annotation limits

The letter does not reproduce the December 4, 1989 request, identify the producer, or include the latest proposed Regulation 1529 draft or the enclosed copies of Regulations 1501, 1521, and 1660. It supplies no qualified motion picture, raw or master tape, production or post-production work, equipment, set, studio, prop, wardrobe, photograph, makeup, storyboard, artwork, stock footage, release print or dub, slide show, contract, invoice, purchase, resale certificate, tax-paid record, tax return, completed transaction, audit, assessment, refund, or later outcome.

The live annotation preserves only the results for computer-graphics discs, intermediate dubs, storyboards, still photographs, certain paintings/models/artwork, and slide-show film. It omits the blank-tape, edited-tape, equipment, sets, studio, props, wardrobe, editing, cinematography, crew, makeup, stock-film, producer-charge, technological-modification, release-copy, and slide-show-production analyses; the qualified-picture assumption; the proposed-regulation status; cited subsections and other regulations; absent materials and records; and later-outcome gap.

What this means for you

Producers, post-production houses, and tax professionals

Classify each invoice line by what the customer receives and who retains the equipment. Keep qualified-motion-picture support, identify intermediate versus release copies, and separately document taxable rentals and physical property rather than assuming every production-related charge is exempt.

Common questions

Q: Was blank tape bought by the producer exempt?

A: No. It was taxable when bought for the producer's use in shooting or editing.

Q: Was edited tape furnished by a post-production house taxable?

A: No, when the post house recorded or edited it for use in the qualified production; the post house was the tape's consumer.

Q: Were equipment charges always taxable rentals?

A: No. A charge was a nontaxable production service when the post house retained possession and used the equipment to film the production. Equipment actually rented to the producer was generally taxable, subject to the tax-paid-property exception.

Q: Were all artwork and models exempt production services?

A: No. The exception described in the opinion covered items transferred with qualified production services and used to film special effects, titles, or credits.

Q: Were release prints and dubs exempt?

A: No. The producer could buy them for resale, but its retail sale to the client was taxable.

Q: Did tax paid by a photograph seller make its retail sale nontaxable?

A: No. The letter said the sale to the producer remained taxable and the seller could take a tax-paid-purchase-resold deduction.

Q: Did the letter decide the treatment of every set?

A: No. It requested more information about the specific property and the meaning of “semi-permanent set.”

Citations and references

• Proposed California Sales and Use Tax Regulation 1529(a)(1), (b)(2), (b)(2)(B)1, (b)(2)(D)4, (b)(4)(A), (b)(6)(A), and (b)(6)(B)
• California Sales and Use Tax Regulation 1521 — cited and enclosed copy absent
• California Sales and Use Tax Regulation 1660(c)(2) — cited and enclosed copy absent
• California Sales and Use Tax Regulation 1701
• California Sales and Use Tax Regulation 1501 — enclosed copy absent
• December 4, 1989 request and September 1, 1989 proposed Regulation 1529 draft — described but not included
• Pictures, production work, property, contracts, invoices, purchases, transfers, and tax records — described or assumed but not documented

Verbatim support

From the official letter:

We assume that, as you pointed out, all of the motion pictures involved in the transactions are qualified motion pictures as defined in the proposed regulation.

In this case, where the post-house retains possession of the equipment and uses it to film your production, the transaction is not a lease of the equipment. The charge to you is for a nontaxable qualified production service.

The charges for paintings, models, or artwork are nontaxable only in those cases where they are transferred in connection with the performance of qualified production services, and the paintings, models, and artwork were used for filming special effects, titles, or credits.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 375.0901
• Original supporting opinion: 375.0901 PDF

Original ruling text

375.0901

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

March 1, 1990

Mr. A--- C. R--A-- C. R--- P--XXX --- ----- ---, CA XXXXX
SR -- XX-XXXXXX
Dear Mr. R---:
Your December 4, 1989 letter to the --- Office of the State Board of Equalization regarding the application of sales tax to your charges involved with the production of videotapes has been referred to the legal staff for reply. You explained that you are an independent producer of industrial videotapes for sales and training purposes. You rent rather than purchase almost all of your equipment and hire freelance crews. You have reviewed the Board’s proposed Sales and Use Tax Regulation 1529, dated September 1, 1989, and asked for confirmation of your understanding of the application of tax to the following transactions you noted. We assume that, as you pointed out, all of the motion pictures involved in the transactions are qualified motion pictures as defined in the proposed regulation. Where you list a series of transactions which call for the same application of tax, we have listed the transactions and provided the applicable response. The references to Regulation 1529 are to the proposed regulation. A copy of the latest draft is enclosed for your further information. “Blank video and audio tape purchased from film and tape house for use in shooting and editing. We use tape for shooting and provide the tape to the post production house. “Blank tape purchased from post house to be use by us in off line editing room which we rent from the post house. We do the editing rather than hire an editor from the post house.”

Mr. A--- C. R---

-2-

March 1, 1990
375.0901

Tax applies to the sale of the blank video and audiotape to you. (Reg. 1529, subd. (a)(1).) “Tape purchased through post house on which their editor records our edited programs.” If the post-production house transfers tape to you which it has recorded or edited for your use in a production, the post-production house performs qualified production services. It is the consumer of the tape, and tax does not apply to its charge to you. (Reg. 1529, subd. (b)(2)(B)1.) “Computer disks furnished by the post house to us containing graphics created by them for our production.” We agree with your conclusion that , under subdivision (b)(2)(B)1. of the regulation, the furnishing of the computer-generated graphics is a nontaxable qualified production service. “Dub tapes produced by the post house for B rolls, work prints, client approval prints and other dubs for any intermediate use on the qualified motion picture before the release print is made.” Since the dub tapes are not release prints, the charge to you for the tapes is for a nontaxable qualified production service. (Reg. 1529, subd. (b)(2)(B)1.) “Video equipment rented from the post house and used by our cinematographer to film our production.” Generally, tax applies to the post-production house’s charge to you for the lease of the equipment unless the post-production house leases the equipment to you in substantially the same form as acquired as to which the post-production house has paid sales tax reimbursement or timely paid use tax measured by the purchase price. (Reg. 1660, subd. (c)(2).) “Video equipment rented from the post house and used by their cinematographer to film our production.” In this case, where the post-house retains possession of the equipment and uses it to film your production, the transaction is not a lease of the equipment. The charge to you is for a nontaxable qualified production service. (Reg. 1529, subd. (b)(6)(A).) “Sets built or rented for the production such as a walls, kitchen furniture and props.”

Mr. A--- C. R---

-3-

March 1, 1990
375.0901

In order to provide you with a specific answer to this transaction, we would need further explanation as to the specific property transferred to you. Enclosed is a copy of Sales and Use Tax Regulation 1521, Construction Contractors, which explains the application of tax to charges for the construction of improvements to real property. If you enter into a studio facilities contract with a studio which provides you the use of property, the application of tax is discussed at subdivision (b)(6)(B) of the regulation. “Studio charges for rental of the studio shooting space, lighting rental, telephone, and the studio manager. Each listed separately on their invoice. Assume that the studio provides nothing towards the sets, props, or wardrobe.” We agree with your conclusion that the only charge subject to tax in this transaction would be the charge for the rental of the lights. That charge would be nontaxable if it were for tax-paid property leased in substantially the same form as acquired as discussed above regarding the charge for rented video equipment. “Rental charges for a set of semi-permanent nature such as a western town façade. “Rental of permanent sets and actual locations like a house or a store.” We would need further information as to what you mean by “semi-permanent set”. If the western town façade were real property, tax would not apply to the charge. If, when you rent a permanent set, items of tangible personal property are included, the application of tax is as described at subdivision (b)(6(B) of the regulation. “Rental or purchase of props or wardrobes.” Tax would apply to the sale to you of props or wardrobes. Tax would apply to the lease, unless the lease were of tax-paid property leased in substantially the same form as acquired. “Purchase of still photographs to be used in the qualified motion picture.” Tax would apply to the sale to you of still photographs which you use. You noted that tax would not apply if the seller paid tax on his purchase. We disagree. Tax would apply to the seller’s retail sale to you regardless that the seller purchases the photographs tax paid. In such case, the seller could take a tax-paid purchase resold deduction. See Sales and Use Tax Regulation 1701, “Tax-Paid Purchases Resold”. “Charges for on line editing including tapes done by post production house on the production. “Charges for the services of cinematographer, grip, gaffer, drivers.”

Mr. A--- C. R---

-4-

March 1, 1990
375.0901

The charges for the editing and cinematography are for nontaxable qualified production services. The charges for grips, gaffers, and drivers are nontaxable, because those persons do not fabricate tangible personal property. Rather, their charge is for nontaxable services. “Charges for make up artist hired for making up actors. “Charges to us by the make up artist for supplies used in the production.” Again, the charges for the labor of the make-up artists are nontaxable not because they qualify as qualified production services under the regulation. The are nontaxable because, by merely applying make-up, the make-up artist performs a service rather than a sale. If the make-up artist does not apply make-up, but merely sells supplies to you, tax applies to the retail sale of the make-up artist’s sale. “Charges to us for storyboards.” The Board has determined that charges for storyboards are nontaxable. (Reg. 1529, subd. (b)(2)(D)4.) “Charges to us for paintings, models, or art work regardless of whether or not they are transferred to the customer.” You noted that you believe this charge is nontaxable as a qualified production service. We disagree. The charges for paintings, models, or artwork are nontaxable only in those cases where they are transferred in connection with the performance of qualified production services, and the paintings, models, and artwork were used for filming special effects, titles, or credits. For example, if you purchase a model ship from a model builder, tax applies to the sale to you. “Stock film shots purchased from a stock house for use in the production.” We agree that tax does not apply to the charge. (Reg. 1529, subd. (b)(4)(A).) “Charge to our client for producing the production, not including release prints or dubs beyond the first one provided to the client.” As provided in Regulation 1529, when you produce a qualified motion picture for a client, you are the consumer of the tangible personal property which you consume in making the production. Tax does not apply to your charge to the client for the motion picture. Tax does apply to your charge for the release prints.

Mr. A--- C. R---

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March 1, 1990
375.0901

“Charge to our client for modifying a production which had been done previously.” Under subdivision (b)(2) of the regulation, qualified production services includes the technological modification or alteration of a qualified motion picture. Your charge for modifying a production is nontaxable. “Charges to us by the post or dub house for release dubs to be provided to the client. “Charges to our clients for release dubs to be provided to them.” You may issue a resale certificate to the vendor of the release prints when you purchase the release prints to sell to your client. Tax applies to your retail sale of the release prints or dubs to your client. You noted that you understand that a multi-image slide show is not a qualified motion picture. You believe that you can purchase film and processing for resale, and the entire charge for the production is taxable. We agree that tax applies to your charge for a multi-image slide show which you produce for a client. You may purchase for resale only that film and processing of film which you actually sell to the client. Tax applies to the sale to you of film and processing of film which you use in producing the end products. As you requested, we are enclosing copies of Sales and Use Tax Regulations 1501 and 1660. We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel

RLD:sr
Encs.