Could a contractor buy 35mm film for resale when DMV employees exposed it and the contractor used it to produce driver's licenses?

Plain-English summary

A corporation processing film and printing California driver's licenses bought every supply tax-paid except 35mm color negative film from Eastman Kodak. Under its DMV arrangement, it inventoried and supplied the film and equipment; DMV employees decided when to expose and process the film; and the contractor developed it, made a positive that became part of each license, returned the license and microfilm copy to DMV, and stored the negatives.

DMV could request return or destruction of the negatives, restricted their use for security, and prohibited the contractor from reclaiming their silver. The contractor argued that title passed when DMV personnel loaded the film into a camera because DMV then exercised complete control.

The appeals recommendation found that the contractor consumed the film. Regulation 1528(b)(1) taxed property a photo finisher used unless it became an ingredient or component of the sold item; neither the contractor nor the appeals attorney found that the negative film became part of the license. The operative contract expressly retained title to supplies in the contractor and made it responsible for maintenance or replacement. DMV paid a set amount per produced license or identification card and microfilm image, without a separate film price or tax.

DMV's control over when employees exposed film and over later storage or destruction did not override the contract's title provision. The recommendation sustained use tax measured by $1,064,576 of ex-tax film purchases and recommended redetermination without adjustment.

The Decision and Recommendation is dated September 30, 1991. Its October 18 transmittal letter allowed reconsideration or a Board-hearing request, so the published source does not establish final Board action.

Audit period, assumption and source posture

The September 25, 1991 Sacramento hearing addressed a liability for September 1, 1985 through June 30, 1988. The quoted DMV contract ran only from March 31, 1986 through December 31, 1990, while the audit included numerous invoices from 1985 and early 1986. Without supplying the earlier contract, the appeals attorney assumed it contained the same provisions and applied the later analysis backward. That unverified assumption is part of the recommendation's foundation.

The contractor and predecessor entities had supplied California photo-identification systems since 1961, and its adjacent facility could process up to 25,000 photos daily. The record quotes contract sections F.8, F.20, F.20.1, F.25, F.26 and G.1, but supplies no complete contract, earlier contract, invitation for bids, petition, audit report, scheduled invoices, billing, film, license, microfilm, security instruction, hearing transcript, reconsideration, Board hearing or final action. The $1,064,576 is the measure of ex-tax purchases, not a stated tax amount.

The live 420.0110 annotation, in the 2026 revision of the Business Taxes Law Guide, retains the contract, 35mm film, DMV exposure, contractor processing, positive incorporated into licenses, microfilm, retained title, no separately stated film charge, security restrictions and September 30, 1991 date. It says negatives were stored until DMV requested destruction, while the recommendation says DMV could request that they be returned or destroyed. It omits the audit period and $1,064,576 measure, Kodak, tax-paid other supplies, contract dates and sections, replacement duty, per-unit billing language, silver restriction, pre-contract invoices and assumed earlier terms, hearing and recommendation posture, reconsideration options and absent final Board action.

CDTFA's Annotated Legal Opinions collection says the letters are summarized as annotations and that statutory law controls whenever a statute and annotation conflict. The official five-page PDF has a clean native text layer and one page-1 letterhead stencil rather than scanned text, so no OCR was required. Both fresh direct PDF downloads and both live-page downloads were byte-identical, duplicate default PDF text extractions matched, and the original-text section remains byte-identical to its committed version and fresh extraction after removal of only the extractor's terminal newline and form feed.

What this means for you

Government contractors and tax professionals

For production materials furnished under a government contract, align the contract, invoices and actual transfers. Identify who holds title, whether the material becomes part of the delivered item, whether the customer pays a separately stated material price and tax, and when any transfer occurs. Do not extend this recommendation to periods governed only by an assumed missing contract.

Common questions

Q: Why was the film treated as consumed rather than resold?

A: It did not become a component of the license, the contract retained title in the contractor, and DMV was billed per completed license and microfilm image without a separate film sale.

Q: Did DMV's physical control transfer title?

A: No, according to the recommendation. Exposure decisions, security restrictions, storage and destruction control did not override the contract's express retained-title provision.

Q: What did the $1,064,576 represent?

A: The audit measure for ex-tax film purchases not reported, not the stated amount of tax.

Q: Did the quoted contract cover the whole audit period?

A: No. It began March 31, 1986; the audit began September 1, 1985. The appeals attorney assumed the missing earlier contract had the same terms.

Q: Was this a final Board decision?

A: The source does not establish one. The October 18 transmittal offered reconsideration and Board-hearing routes before final Board consideration.

Citations and references

• California Sales and Use Tax Regulation 1528(b)(1) — quoted for consumed photo-finishing materials versus incorporated components
• DMV contract sections F.8, F.20, F.20.1, F.25, F.26 and G.1 — quoted for billing, film, retained title, responsibility and invoicing
• Pre-March 31, 1986 DMV contract — not supplied; assumed to match the quoted later contract
• Petitions, audit report, scheduled invoices, complete contracts, film, licenses, microfilm, hearing record, reconsideration, Board hearing and final action — described or implicated but not included

Verbatim support

From the official September 30 recommendation and October 18 transmittal:

Petitioner does not contend and this appeals attorney could not find that the film becomes a component part of the driver's license produced. The film, therefore, must be found to be taxable as a consumed item unless it can be shown that the film was resold to DMV prior to any use by petitioner.

The contract, however, specifically states that petitioner is to retain title to the film. The billings to DMV are based on a set amount per driver’s license produced.

It is assumed by this appeals attorney that the prior contract with DMV contained the same provisions as the contract which went into effect March 1986.

It is recommended that the tax liability be redetermined without adjustment.

If neither a request for Board hearing nor a Request for Reconsideration is received within thirty (30) days from the date of this letter, the Decision and Recommendation will be presented to the Board for final consideration and action.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 420.0110
• Original supporting opinion: 420.0110 PDF

Original ruling text

420.0110
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE (916) 445 - 3956

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR
Third District, San Diego

(916) 920-7446

Matthew K. Fong
Fourth District, Los Angeles

October 18, 1991

GRAY DAVIS
Controller, Sacramento

X--------------------------

Burton W. Oliver
Executive Director

Re: X--------------------Enclosed is a copy of the Decision and Recommendation pertaining to the petition for redetermination in the above-referenced matter. I have recommended that the determination be redetermined without adjustment as explained in the Decision and Recommendation. There are three options available to you at this point.

1. If, after reading the Decision and Recommendation, you believe that you have new
   evidence and/or contentions, you should file a Request for Reconsideration. No special form is required to file the Request for Reconsideration, but it must be filed within 30 days from the date of this letter and clearly set forth any new contentions. If new evidence is the basis for filing the request, the evidence must be included. Direct any such request directly to me, with a copy sent to the state Board of Equalization, P.O. Box 942879, Sacramento, CA 94279-0001, Attn: Principal Tax Auditor. I will subsequently notify you whether the request has been taken under review or whether the request is insufficient to warrant an adjustment. If I conclude that no adjustment is warranted, I will then notify you of the procedure you can follow to request an oral hearing before the Board.
2. If, after reading the Decision and Recommendation, you find that there is no basis for
   filing a Request for Reconsideration, but nevertheless desire to have an oral hearing before the Board, a written request must be filed within 30 days with Ms. Janice Masterton, Assistant to the Executive Director, Board of Equalization, P.O. Box 942879, Sacramento, CA 94279-0001.
3. If neither a request for Board hearing nor a Request for Reconsideration is received
   within thirty (30) days from the date of this letter, the Decision and Recommendation will be presented to the Board for final consideration and action. Very truly yours, Susan M. Wengel Staff Counsel

STATE OF CALIFORNIA
BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION
In the Matter of the Petition for
Redetermination Under the Sales and Use
Tax Law of:

DECISION AND RECOMMENDATION

No. Z-----------------------

X------------------------Petitioner

The above-referenced matter came on regularly for hearing before Appeals Attorney Susan M. Wengel on September 25, 1991 in Sacramento, California. Appearing for Petitioner:

X-----------------------------

Appearing for the
Sales and Use Tax Department:

Mr. Landon Carter
Senior Tax Auditor

Protested Item
The protested tax liability for the period September 1, 1985 through June 30, 1988 is measured by: Item

State, Local and County

Ex-tax purchases of film not reported

$1,064,576

Contentions of the Petitioner
The film was sold to the Department of Motor Vehicles and not consumed by petitioner.

Summary of Petition
Petitioner is a corporation which since 1985 has engaged in the business of processing film, selling embossing machines and printing state driver's licenses. Petitioner and its predecessor entities have been in the business of supplying photo identification systems since 1961 when the business first received a contract with the State of California to supply all the California driver's licenses. During an audit by the Sales and Use Tax Department (Department) the auditor noted that petitioner purchased all its supplies tax paid except for the 35mm film purchased from Eastman Kodak. The auditor ascertained that petitioner's contract with the Department of Motor Vehicles (DMV) stated that petitioner retained title to all supplies and equipment. Film was listed as a supply item. Because petitioner did not sell the film to DMV and did not bill DMV separately for the film use tax was assessed. Petitioner contends that it should be allowed to purchase the film ex-tax on the ground that it resells the film to DMV. Petitioner's attorney, X-----------, has stated that petitioner purchases 35mm color negative film, inventories it along with other supplies and then delivers the film to DMV. Once DMV receives the film, petitioner contends that DMV exposes the film and exercises all ownership rights over the film by deciding when the film will be exposed, when it will be processed and what use will be made of the negatives. Once the film is developed by petitioner, a positive is made which becomes part of the driver's licenses produced by petitioner for DMV. The license and a microfilm copy are returned to DMV and the negatives are stored by petitioner until DMV requests that the negatives be returned or that the negatives be destroyed. Petitioner maintains a processing facility adjacent to DMV headquarters and has the equipment and personnel to handle up to 25,000 photos a day. The negatives re stored at petitioner’s facilities. The Department references petitioner's contract with DMV which covers the period March 31, 1986 through December 31, 1990. The following sections are emphasized: “F.8 Billings will be rendered to the Department of Motor Vehicles to include all costs to the Department on the basis of a stated cost per produced license/ identification card and microfilm image acceptable to the Department of Motor Vehicles.

“F.20 Furnish the Department the following supplies, services and assurances for producing driver licenses and/or identification cards and corresponding microfilm copies: “F.20.1 35mm film as specified in the IFB.

“F.25 Retain title to all equipment and supply items furnished under the contract and accept responsibility for their maintenance or replacement. “F.26 Hold the Department harmless from liability arising from loss or damage to equipment or supplies from causes beyond the Department's control. “G.l X--------- will provide an original invoice plus three copies. An overall summary sheet will list the following: Number of produced units (driver licenses and identification cards), including lamination and microfilm image.”

The Department takes the position that by contract petitioner retains title to the film and is responsible to replace the film if it is lost or destroyed. No separate charges are made for the film as DMV is billed based on the number of licenses produced. Because the film is consumed by petitioner and not resold to DMV, the auditor assessed the use tax. Petitioner acknowledges that it retains title to the film as per section F.25, however, X----asserts that petitioner only retains title until DMV personnel load the film into a camera for exposure. Petitioner contends that once the film is loaded into a camera, DMV exercises complete and absolute control over the film and title passes. X-------------- has stated that it is DMV employees who use the film, expose the film and determine when the film will be sent to petitioner for processing. By the contract, DMV reserves the authority to decide when the film is destroyed and limit any use of the film by petitioner. Petitioner notes that DMV even precludes petitioner from reclaiming the silver content of the negatives. It is noted by this appeals attorney that the contract with DMV is operative from March 31, 1986 through December 31, 1990. The audit period extends through June 30, 1988. The auditor has scheduled numerous invoices for periods prior to March 31, 1986. It is assumed by this appeals attorney that the prior contract with DMV contained the same provisions as the contract which went into effect March 1986. The analysis applied to transactions between March 31, 1986 and December 31, 1990 will therefore be applied to the invoices scheduled for 1985 and early 1986. Analysis-and Conclusion Sales and Use Tax Regulation 1528(b)(1) provides that tax applies to sales to photo finishers of all tangible personal property used by them in printing pictures or making enlargements except property becoming an ingredient or component part of the prints, enlargements and other items sold by them. Petitioner does not contend and this appeals attorney could not find that the film becomes a component part of the driver's license produced. The film, therefore, must be found to be taxable as a consumed item unless it can be shown that the film was resold to DMV prior to any use by petitioner. Evidence that the film was sold to DMV would best be expressed in the contract or on a sales invoice. A billing which separately states an amount for the film sold, as well as the appropriate tax, would be evidence that the film was sold to DMV. The contract, however, specifically states that petitioner is to retain title to the film. The billings to DMV are based on a set amount per driver’s license produced. While this billing obviously includes the cost of the film consumed, there is no separate billing which would infer that the film was actually sold to DMV let alone that it was sold to DMV prior to any use by petitioner. It is recognized that by contract, and for security reasons, DMV severely restricted petitioner's use of the film once the licenses were printed. These restrictions, however, do not determine which entity holds title to the film. By the contract, petitioner retained title. Had it wished to sell the film to DMV and separately bill the item plus tax it could have done so. The fact that petitioner agreed to the method of billing dictated by DMV cannot form a basis for excusing petitioner from its use tax liability.

Recommendation
It is recommended that the tax liability be redetermined without adjustment.

Susan M. Wengel, Staff Counsel

9/30/1991