Did film cans, film cores, videotape cases, and audiotape cases qualify for California's teleproduction and postproduction partial exemption?

Plain-English summary

A nonprofit film institution restored, preserved, archived, and managed visual and audio assets. It asked whether film cans, film cores, videotape cases, and audiotape cases qualified for California's teleproduction and postproduction partial exemption.

California assumed the institution otherwise met the qualifying-business and funding tests. But ordinary cans, cores, and cases were receptacles used to store completed film and tape products after the preservation or archiving process. They were not directly involved in that process and were not the electronic media products resulting from it.

The letter distinguished information stored on film, videotape, and audiotape as electronic data-storage equipment from the cans, cores, and cases holding those media. It assumed the containers were like ordinary buckets or brackets because the requester supplied no exemplars, unique-component specifications, or special characteristics.

The partial exemption therefore did not apply. The opinion also rejected the idea that buying the containers from an out-of-state vendor avoided tax. California use tax still applied to property bought for use in the state, with collection or self-reporting responsibility depending on the vendor's California business status.

Source and live-annotation limits

The letter substantially quotes but does not reproduce the October 19, 2001 request. It does not identify the curator or institution or supply an NAICS classification, funding allocation, film or tape asset, preservation or archival process, database file, container, vault, exemplar, specification, special characteristic, own-use or inventory record, purchase, vendor nexus record, invoice, sales-tax reimbursement, use-tax collection or self-report, tax return, completed transaction, audit, assessment, refund, or later outcome. It warns that incorrect assumptions could change the tax result.

The live annotation preserves the no-partial-exemption result and the distinction between preservation/archiving processes and later product storage. It omits the curator and nonprofit institution, quoted October 19 request, restoration and preservation facts, out-of-state purchase proposal, base sales/use-tax framework, NAICS and 50%-funding assumptions, own-use assumption, missing exemplars and specifications, electronic-media distinction, cited subsections and Regulation 1521, use-tax collection and self-reporting rules, absent records, and later-outcome gap.

What this means for you

Film archives and tax professionals

Separate equipment that directly performs restoration, preservation, or postproduction from containers used only afterward. Document qualifying activities, funding percentages, item specifications, use, vendor nexus, and California use-tax reporting. If an item has unique components or special characteristics, supply those facts rather than assuming this ordinary-receptacle analysis controls.

Common questions

Q: Did film cans and tape cases qualify for the partial exemption?

A: No.

Q: Why not?

A: Their function was storing products after preservation or archiving, not directly performing those processes.

Q: Would purchasing them outside California avoid tax?

A: No. Applicable use tax still had to be collected or self-reported.

Q: Did the institution prove the containers had special characteristics?

A: No. It supplied no exemplar or specification, so the letter assumed ordinary holding, carrying, or storage receptacles.

Q: Who handled use tax on an out-of-state purchase?

A: A vendor engaged in California collected it; otherwise, the institution remained responsible to self-report applicable use tax.

Citations and references

• California Revenue and Taxation Code §§ 6051, 6201, 6202, 6203, 6378(c)(2), 6378(c)(3), 6378(c)(5), and 6401
• California Civil Code § 1656.1
• California Sales and Use Tax Regulation 1700(a)
• California Sales and Use Tax Regulation 1532(c)(2), (c)(2)(A), (c)(4), (c)(4)(C), (c)(5), (c)(5)(B), and (c)(6)(A)
• California Sales and Use Tax Regulation 1521 — materials definition
• NAICS Code 512191
• October 19, 2001 request — substantially quoted but not included
• Institution, funding, containers, specifications, purchases, vendors, and tax records — described or assumed but not documented

Verbatim support

From the official letter:

We note that you have not provided us with an exemplar of the film cans, film cores, videotape cases and audiotape cases or specifications with respect to these items unique components and special characteristics, if any.

The cans, cores and cases are used in a step beyond the process of preserving or archiving as their purpose is to store the products resulting from the process.

Where the A--- purchases property outside California for use in this state from a retailer not engaged in business in California, the A--- remains obligated to self-report any applicable use tax on such property.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 375.0975
• Original supporting opinion: 375.0975 PDF

Original ruling text

375.0975

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082
TELEPHONE (916) 445-3723
FAX (916) 323-3387

DEAN ANDAL
Second District, Stockton
CLAUDE PARRISH
Third District, Torrance

www.boe.ca.gov

JOHN CHIANG
Fourth District, Los Angeles
KATHLEEN CONNELL
State Controller, Sacramento

January 18, 2002

JAMES E. SPEED
Executive Director

F--- H---, Curator
A--- F--- A--XXX --- --- Blvd.
--- ---, CA XXXXX
Re:

Request for Legal Opinion
Regulation 1532

Dear Mr. H---:
This is in response to your letter dated October 19, 2001, addressed to Program Policy Specialist James Kuhl regarding the application of the teleproduction and postproduction partial sales and use tax exemption set forth in Revenue and Taxation Code section 6378 to your company’s operations. You state: “I work at a non-profit film institution where our activities include management of visual and audio assets, restoration, preservation, and archiving of film and video elements, creation of database files, and other ‘postproduction services’ . . . “Most of the standard equipment used in post production and film preservation is pretty easy to identify (film splicers, flatbed editors, video duplicators, etc.); however, some of the equipment we use is not that easy to categorize. For instance, an important part of our work in film preservation is the proper storage of film elements and tape masters in archival containers and temperature controlled vaults. Most people generally think of ‘media preservation’ as repair and restoration of original film and video elements – but this is really just the first step in the preservation process. Only proper storage in approved archival containers and controlled environmental conditions will insure a preservation element’s future availability.

F--- H---, Curator

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January 18, 2002
375.0975

“The reason I contacted your office last week is because there appears to be some confusion with the equipment manufacturers over which products are considered ‘equipment used for post production and preservation’ as defined in the Regulation. I was recently informed by one of our vendors that according to section (c)(6)(A), archival film containers are not included for tax exemption in Regulation 1532 since they are considered ‘equipment used to store products.’ While it’s true that some of these same containers could be used to store products to be sold, this is not the case in the film preservation field. Preserved film masters and tape elements are not ‘products’ to be resold (as with commercially available DVDs or videotapes), but rather are ‘assets’ that must be archived in proper storage conditions in order to preserve them for future use. “ . . . It seems a bit inconsistent with the purpose of Regulation 1532 that this type of material would not be included in the tax exemption, since as I’ve outlined above, archival containers and storage media are just as integral to preservation and postproduction activity as film splicers and video transfer equipment. This would also encourage archival institutions such as ours to purchase storage equipment and supplies from California-based companies rather than outside vendors, which is the original intention of the Regulation. . . .” We understand you to ask whether your purchases of archival film containers and supplies such as film cans, film cores, videotape cases and audiotape cases qualify for the partial exemption. DISCUSSION As a starting point, California imposes a sales tax on the gross receipts from the retail sale of tangible personal property inside the state unless an exemption or exclusion otherwise applies. (Rev. & Tax. Code § 6051.) Although this tax is imposed on the retailer, the retailer may collect tax reimbursement (usually itemized on the invoice as “sales tax”) from the purchaser if the contract of sale so provides. (Civ. Code § 1656.1; Reg. 1700(a).) When sales tax does not apply, use tax is imposed on the sales price of tangible personal property purchased from any retailer for storage, use or other consumption in this state, unless that use is specifically exempt by statute. (Rev. & Tax. Code §§ 6201, 6401.) This tax is imposed on the person actually storing, using or otherwise consuming the property. (Rev. & Tax. Code § 6202.) Revenue and Taxation Code section 6378, as explained by Regulation 1532, provides a partial exemption from tax on the gross receipts or sales price from the sale or use of certain tangible personal property used primarily in providing teleproduction or other postproduction services (hereafter “partial exemption”). This partial exemption is generally available to persons that are primarily engaged in teleproduction or other postproduction activities as described in Code 512191 of the North American Industry Classification System (“NAICS”) Manual. (Rev. & Tax. Code § 6378(c)(2); Reg. 1532(c)(2).) Those activities generally include processes such as film or video editing; film and tape transfers; subtitling; credits; closed captioning;

F--- H---, Curator

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January 18, 2002
375.0975

special effects; or animation. (Rev. & Tax. Code § 6378(c)(3); Reg. 1532(c)(4).) Those activities also include management of visual or audio assets and related files stored as data; film, video or audio restoration and preservation; archiving; film cleaning; and creation of data files related to a service described herein. (Reg. 1532(c)(4)(C).) A non-profit establishment is “primarily” engaged in teleproduction or other postproduction activities when 50 percent or more of the funds allocated to the establishment are attributable to teleproduction or other postproduction services. (Reg. 1532(c)(2)(A).) We assume that the non-profit film institution (hereafter “A---”) you work for is engaged in a line of business described in Code 512191 of the NAICS Manual and that 50 percent or more of the funds allocated to the A--- are attributable to teleproduction or other postproduction services. We further assume that the film cans, film cores, videotape cases and audiotape cases are purchased by the A--- for its own use and not as inventory intended for resale. In other words, we assume that the A--- uses the cans, cores and cases to store film and tape they own. We note that you have not provided us with an exemplar of the film cans, film cores, videotape cases and audiotape cases or specifications with respect to these items unique components and special characteristics, if any. In that regard, we have made certain assumptions to facilitate our response. If any of our assumptions are incorrect, then the tax consequences may be different from those explained in this letter, and you should write to us again providing further facts. Tangible personal property used in conjunction with teleproduction or other postproduction activities is defined in Regulation 1532(c)(5) and generally includes machinery and equipment, including component parts (e.g., duplication equipment); equipment or devices used or required to operate, control, regulate, or maintain the machinery (e.g., electronic data storage equipment); and, materials (as defined in Regulation 1521). Tangible personal property does not include furniture, inventory, or equipment used to store products. (Rev. & Tax. Code § 6378(c)(5); Reg. 1532(c)(6)(A).) We assume that the film cans, film cores, videotape cases and audiotape cases purchased by the A--- are similar to a container, bucket or bracket which serve as a receptacle for holding, carrying or storing items such as film, videotape and audiotape. As noted above, tangible personal property includes information stored on electronic media such as film, videotape and audiotape, i.e., electronic data storage equipment. (Reg. 1532(c)(5)(B).) However, tangible personal property does not include cans, cores and cases as such items are considered equipment used to store products. (Reg. 1532(c)(6)(A).) While we appreciate that the proper storage of film elements and tape masters is an important part of your work in preservation and archival, items such as cans, cores and cases are not directly involved in the process of preserving or archiving, nor are they the products (e.g., film, tape or other multimedia format) that result from such a process. The cans, cores and cases are used in a step beyond the process of preserving or archiving as their purpose is to store the products resulting from the process. Such items do not qualify as tangible personal property used primarily in teleproduction or postproduction within the meaning of Revenue and Taxation Code section 6378. Consequently, the partial exemption does not apply to the retail sale of film cans, film cores, videotape cases, and audiotape cases to the A---.

F--- H---, Curator

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January 18, 2002
375.0975

Lastly, you state that the A--- will purchase its storage equipment from out-of-state vendors if the sale of storage containers by California vendors to the A--- is not subject to the partial exemption. As noted above, where sales tax does not apply, such as when the sale takes place outside the state, use tax is imposed on the sales price of property purchased from a retailer for the storage, use, or other consumption of property inside this state. (Rev. & Tax. Code §§ 6201, 6401.) This tax is imposed on the person actually storing, using, or otherwise consuming the property. (Rev. & Tax. Code § 6202.) A retailer engaged in business inside this state is required to collect this tax from its customers and remit it to this Board. (Rev. & Tax. Code §§ 6202, 6203.) This means that tax still applies to property that the A--- purchases outside California for use in this state. Where the A--- purchases property outside California for use in this state from a retailer engaged in business in California, the out-of-state retailer is responsible to collect use tax from your company. Where the A--- purchases property outside California for use in this state from a retailer not engaged in business in California, the A--- remains obligated to self-report any applicable use tax on such property. I hope this answers your question. If you have any further questions, please write again. Sincerely,

Trecia M. Nienow
Tax Counsel
TMN/ef
cc:

Mr. James Kuhl (MIC: 50)
Mr. Larry Bergkamp (MIC:44)
Mr. Steven Gray (MIC:44)
--- --- District Administrator (--)