How did California distinguish nontaxable master reels and protection submasters from taxable broadcast submasters and VHS exhibition dubs?

Plain-English summary

A provider said it produced commercial videotapes from script through a three-quarter-inch or one-inch master reel and made several kinds of submasters and VHS dubs. A branch-office representative had advised that the reel used to create the final master was taxable; senior tax counsel disagreed for the assumed qualified productions.

California said the master reel transferred before exhibition was nontaxable. Even if the first tape was exhibition quality, it was the nontaxable principal release print. The producer consumed and owed tax on raw tape, artwork, and other manufacturing aids used to make it.

Submasters used for exhibition were taxable release prints; the opinion suggested calling them broadcast dubs or air dubs. A protection submaster used only to make later exhibition copies was the product of nontaxable qualified production services.

VHS dubs that were the client's exhibition-ready end product were taxable on total gross receipts, including associated supervisory time, except for the principal-print treatment described above.

Source and live-annotation limits

The official PDF responds to an April 18, 1990 letter to Tax Counsel John Abbott and encloses Regulation 1529, but neither document is included. Counsel expressly assumed all videotape productions at issue were qualified motion pictures. The source identifies no client or production and supplies no script, master, submaster, VHS dub, raw tape, artwork, other aid, contract, charge, supervisory-time record, invoice, return, assessment, refund, or later outcome.

The live annotation preserves the pre-exhibition master-reel exclusion, taxable broadcast or air submasters, and nontaxable protection submasters. It omits the branch-office advice, commercial-purpose assumption and private-use exclusion, principal-release-print rule, producer's raw-stock, artwork, and manufacturing-aid consumption, Regulation 1529 pinpoints, VHS and supervisory-time result, missing records, and no-outcome limit.

What this means for you

Video producers, duplicators, and tax professionals

Classify each output by actual function: principal master, protection copy, broadcast or air dub, or exhibition-ready VHS. Labels help recordkeeping but use controls the result.

Common questions

Q: Was the master reel taxable?

A: No, when transferred before exhibition as the principal version.

Q: Was a protection submaster taxable?

A: No.

Q: Were broadcast and VHS exhibition dubs taxable?

A: Yes, on total gross receipts as described.

Q: Did counsel accept the branch office's view that the final-master reel was taxable?

A: No. For the assumed qualified productions, the first transferred tape was a nontaxable principal release print even if suitable for exhibition.

Q: Did the source prove each production was qualified?

A: No. Counsel expressly assumed that fact.

Citations and references

• California Sales and Use Tax Regulation 1529(a)(1)
• California Sales and Use Tax Regulation 1529(b)(1) and (b)(1)(C)
• California Sales and Use Tax Regulation 1529(b)(2), (b)(3)(A), and (b)(3)(B)
• California Sales and Use Tax Regulation 1529(d)(11)(A) and (d)(11)(B)
• April 18, 1990 request — described but not included
• Regulation 1529 — enclosed but absent
• Productions, tapes, materials, supervisory time, contracts, invoices, tax records, and outcomes — described but not documented

Verbatim support

From the official senior-tax-counsel letter:

We assume that all of the videotape productions in question are qualified motion pictures.

In fact, if you transfer the production on a videotape which is of a quality suitable for exhibition, that first videotape is a “principal” release print, and tax does not apply to your charge for that videotape.

The submaster you make for use as a protection copy is an example of such a videotape.

We agree that, if the VHS dub is a release print, tax applies to the total gross receipts from your sale except as noted above regarding charges for principal release prints.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 375.1095
• Original supporting opinion: 375.1095 PDF

Original ruling text

375.1095

STATE OF CALIFORNIA

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

May 29, 1990

Mr. P--- F--XXX --- Way
---, CA XXXXX
RE:

SR – XX-XXXXXX

Dear Mr. F---:
This is in reply to your April 18, 1990 letter to Tax Counsel John Abbott regarding the application of sales tax to your charges for work you perform on videotapes. You note that you understand that the charge for a video production, which you describe as a qualified motion picture from script through production of the master reel on ¾" or 1" videotape, is nontaxable. The master reel is not used for any purpose other than dubbing to a reel used for exhibition of the production. You were advised by a representative of the Board’s branch office in --- county that tax applies to you charge for the reel used to created the final master of a production. You asked for our opinion. Enclosed is a copy of Sales and Use Tax Regulation 1529, Motion Pictures, as amended effective September 22, 1988. Under subdivision (b)(1)(C) of the regulation, tax does not apply to the transfer of all or part of a qualified motion picture when the transfer is prior to the exhibit or broadcast date. A “qualified motion picture” is generally any motion picture or videotape produced for a commercial purpose. The term excludes motion pictures produced for private noncommercial use. (Reg. 1529, subd. (b)(1).) We assume that all of the videotape productions in question are qualified motion pictures. You are correct that tax does not apply to your charge for the videotape production which you transfer on a master reel. In fact, if you transfer the production on a videotape which is of a quality suitable for exhibition, that first videotape is a “principal” release print, and tax does not apply to your charge for that videotape. (Reg. 1529, subd. (b)(3)(B).) You are the consumer of all tangible personal property which you consume in making that videotape, and tax applies to the sale to you of such tangible personal property including the raw videotape stock, artwork, and other manufacturing aides which you use in making the production. (Reg. 1529, subd. (a)(1).)

Mr. P--- F---

-2-

May 29, 1990
375.1095

You note that you are charging tax reimbursement on your charges for submasters which you make for purposes of exhibition but not for submasters you make as protection copies for use in making exhibition submasters. As noted in subdivision (b)(3)(A) of the regulation, tax applies to charges for release prints such as the submasters you make for exhibition purposes. We suggest that for sales tax purposes, you call such submasters “broadcast dubs” or “air dubs” as provided at subdivision (d)(11)(A) of the regulation to distinguish the product from the “submasters” listed at subdivision (d)(11)(B) of the regulation which are not considered to be release prints but are, rather, the product of “qualified production services” as defined at subdivision (b)(2) of the regulation. Tax does not apply to charges for videotapes which you produce as a result of performing qualified production services. The submaster you make for use as a protection copy is an example of such a videotape. You note that you charge tax reimbursement on all your charges for “VHS dubs” which you note is the end product for most of your clients, and all your supervisory time you spend to organize the dubbing. We agree that, if the VHS dub is a release print, tax applies to the total gross receipts from your sale except as noted above regarding charges for principal release prints. 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
Enc.