Is a custom promotional video a taxable sale of property or a non-taxable service, and what about charges for raw footage and project files?

Plain-English summary

A video production company makes promotional videos for small and medium businesses. It shoots footage, edits it into a finished product, and usually delivers it electronically (sometimes on a DVD or thumb drive). In some deals it also delivers the raw footage and project files on a hard drive — charging a separate fee (often 40% of the project cost) for the right to own and edit that raw material. It asked whether the videos, the rights to them, and the raw footage/project files are subject to Colorado sales or use tax.

The Department's answer: the video production is most likely a non-taxable service.

Colorado taxes sales of tangible personal property but not services. When a transaction bundles a service and a transfer of property inseparably, the Department looks to the "true object" of the transaction.

• Under Special Rule 40 ("Service Enterprises"), the true object of producing a video/film is a non-taxable service, even though some property (historically celluloid) is transferred.
• The Colorado Supreme Court's City of Boulder v. Leanin' Tree (2003) applied the true-object test to artists licensing images to a greeting-card maker and held the true object was a non-taxable service, not a sale of the images.
• Here, filming and film-editing are services, the value of the property transferred to the client is relatively insignificant next to the services, and a custom video made for a specific buyer is commonly understood as a contract for the service of filming — like a market-survey report prepared for one customer (treated as a service, per GIL-07-027). So the production reads as a service.
• The raw-footage/project-file charge (up to 40%) is assumed to reflect the value of the services to produce the raw video, not the value of the hard drive and files — so that charge would also likely be viewed as a service.

The important flip side: if the company is rendering a service, it is the consumer — not the retailer — of the tangible personal property it uses to provide that service, including the hard drives, thumb drives, and DVDs it hands to clients. So the company must pay sales tax on that property when it buys it (or consumer use tax if it bought the media tax-free, e.g., out of state).

The Department also flagged limits: it was unclear what intangible rights (e.g., copyrights) were granted (see Leanin' Tree and American Multi-Cinema v. City of Westminster); a later resale of the video by the client to third parties would likely be a taxable sale of property (the service component was performed by the producer, not the client); and not every creative output is a service — the Department would not treat a custom portrait or sculpture as a non-taxable service.

What this means for you

Video producers and creative agencies

A custom video produced for a specific client is generally a non-taxable service in Colorado under the true-object test — but that means you are the end consumer of the discs, drives, and other media you deliver, so you owe sales or use tax on those items when you acquire them. Don't charge your client sales tax on the production and skip paying tax on your own media purchases. If you buy media out of state without tax, self-report consumer use tax.

Clients buying promotional videos

The producer generally isn't charging you sales tax because the production is a service. But if you later resell the video to third parties, your sale may be a taxable sale of property, because the service was performed for you, not by you.

Accountants and tax professionals

This is a textbook true-object analysis: SR 40 (Service Enterprises) + Leanin' Tree (72 P.3d 361) drive the service characterization; the service-provider-as-consumer rule shifts the tax to the producer's input media (§ 39-26-104(1)(a)). Watch the boundaries: separately charged raw footage tracks service value (assumed), intangible-rights transfers are a separate question (American Multi-Cinema, 910 P.2d 64), downstream resale by the client can be taxable, and custom portraits/sculptures are not services. Compare the bundled service-vs-goods analysis in [[gil-15-009-services-in-connection-with-retrieving-and-copying-medical-records]].

Common questions

Q: Is a custom promotional video taxable in Colorado?
A: Generally no — the Department treats producing a custom video as a non-taxable service under the true-object test, even though a disc or drive may change hands.

Q: Then do I owe any tax as the producer?
A: Yes — on your own inputs. Because you're providing a service, you're the consumer of the DVDs, thumb drives, and hard drives you transfer, and you owe sales or use tax when you buy them.

Q: What about the separate charge for raw footage and project files?
A: The Department assumed that charge reflects the value of producing the raw video (a service), not the value of the drive and files, so it would also likely be treated as a service.

Q: Is everything a creative person makes a non-taxable service?
A: No. The Department said it would not treat a custom portrait or sculpture as a non-taxable service, and a client's later resale of the video could be a taxable sale of property.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, is not binding on the Department, and makes no determination on any specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes and rules:
- § 39-26-104(1)(a), C.R.S. (sales tax on tangible personal property, not services)
- 1 CCR 201-5, Special Rule 40 (Service Enterprises; true object of video/film production is a service)
- Department Rule 24-35-103.5 (GIL / PLR procedure)

Cases and guidance:
- City of Boulder v. Leanin' Tree, Inc., 72 P.3d 361 (Colo. 2003) (true-object test)
- American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64 (Colo. App. 1996) (transfer of intangible rights)
- Colorado GIL-07-027 (12/04/2007) (market-survey report treated as a service)

Source

• Landing page: Colorado Sales & Use Tax Letter Rulings
• Original PDF: GIL-14-001.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-14-001
January 14, 2014
XXXXXXXXXXXXXX
ATTN: XXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Promotional Videos
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXX (“Company”) a request for guidance to
determine whether promotional videos for businesses and the rights to such videos and, at
times, project files, raw footage, and other related materials are subject to Colorado sales or
use tax.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues
and is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of
a fee. For more information about general information letters and private letter rulings, please see
Department regulation 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
1. Are promotional videos for businesses and the rights to such videos subject to Colorado
sales and use taxes?
2. Are project files, raw footage, and other related materials subject to Colorado sales or use
tax?
Background

Company is a video production company that primarily produces promotional videos for small and
medium sized businesses. Most of Company’s transactions involve Company shooting video
footage that Company edits into a finished product that is, in most cases, electronically delivered to
clients. In some situations Company delivers the video on a DVD or thumb drive. Clients have the
right to use, duplicate, and sell the finished product.
In other transactions, Company delivers not only the finished product but also the raw footage and
project files on a physical hard drive to the client. This allows the client to create alternative
versions of the video or edit additional clips using portions of the raw footage used and unused in
the finished product. Company separately charges a fee, typically forty percent of the project’s total
cost, for the option to own rights to raw footage and the delivery of raw footage and project files on
a hard drive.
Lastly, Company will also shoot footage that requires less editing and this is done for training
purposes. There may be a small amount of editing and cleanup performed for such videos. In
these cases, Company digitally sends the raw footage to the client.
Discussion
Colorado levies sales tax on the sale, use, or rental of tangible personal property, but not on
the sale of services.1 When a transaction involves both a service and a transfer of tangible
personal property and the price for the service is not separately stated from the price of the
property, then the Department will, if the sale cannot be disaggregated into two separate
transactions because they are inseparably bundled, look to the “true object” of the transaction
to determine whether it is a taxable sale of property or a non-taxable sales of services.
In Department Special Rule 40 “Service Enterprises”,2 the Department states that the “true
object” of a transaction for the production of a video (film) is a non-taxable sale of services,
even though some property (celluloid) is transferred from seller to buyer.
In City of Boulder v. Leanin’ Tree, 72 P3d 361 (Colo. 2003), the Colorado Supreme Court
considered a case in which artists provided a company images for the company’s use in
producing greeting cards. The artists granted the company a license to use the images and
the images were returned to the artists after the company made use of the images. The Court
concluded that the true object of the transaction was the provisioning of a non-taxable service
rather than a taxable sale of the images. In making its determination, the Court reviewed a
variety of tests, including the “true object” test, used by states to make this distinction and
concluded that,
Varied as these analyses may be, they largely share in common some attempt to
identify characteristics of the transaction at issue that make it either more analogous to
what is reasonably and commonly understood to be a sale of goods, or more
analogous to what is generally understood to be the purchase of a service or intangible
right.

1
2

§39-26-104(1)(a), C.R.S. You can view statutes on the Department’s web site at www.colorado.gov/revenue/tax

Tax Library > Statutes.
Special Rule 40, “Service Enterprises”, which can be viewed at www.Colorado.gov/revenue/tax > Tax Library >
Rules and Regulations > Final Regulations > Sales and Use Tax.

2

The basic distinction in determining whether a particular transaction involves a sale of tangible
personal property or the transfer of tangible personal property incidental to the performance of
a service is determining whether the real object sought by the buyer is the service or the
tangible personal property. If the “true object’ of the transaction is the service, which is not
subject to tax even though some tangible personal property is transferred, then the entire
transaction is not subject it tax.
The video production you describe appears to be similar to the film example in the Service
Enterprise special rule.3 Filming and film-editing are generally considered to be the
provisioning of services. The value of the property transferred to the client in most video
productions appears to be relatively insignificant in relation to the services performed.
Moreover, and consistent with Leanin’ Tree, a transaction for the creation of a film for a specific
buyer is commonly viewed as a contract for the service of filming. Finally, this characterization
of the transaction is consistent with other transactions where the service component is
predominant and the service is rendered to a single, specific person. For example, a
compilation of data, such as a market survey report, prepared for a single customer, is
generally treated as a service, even though the seller may provide tangible personal property in
the form of a report to the client.4 It is unclear what intangible rights (e.g., copyrights) are
granted as part of the transactions you describe, but for a discussion of the transfer of such
rights, see Leanin’ Tree and American Multi-cinema v. City of Westminster, 910 P.2d. 64 (Colo.
1994).
We note that Company charges for the raw footage and project file and this charge can be forty
percent of the total cost. We assume that this price reflects the value of the services to
produce the raw video and not the value of the property (i.e., the property consisting of the
hard drive and project files). If correct, this charge would also likely be viewed as a service.
If Company is engaged in the business of rendering a service, Company is the consumer, not
the retailer, of the tangible personal property used to provide that service, including property it
transfers to the client, such as the hard drives, thumb drives, or DVDs. Assuming Company is
providing a service, Company must pay sales tax on such property when it acquires it for use.
If Company does not pay sales tax on these purchases (for example, the property is purchased
outside Colorado), Company must pay consumers use tax to the Department on such items.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule counties.
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4

The question of whether the true object of a transaction is a sale of a service or taxable goods is a difficult issue
where it is difficult to achieve consistency. See Hellerstein, State Taxation (WG&L), sec.12.08(2)(a), citing
Qwest Dex 109 P.3rd 118 (AZ 2005). For example, while the filming of a video may be commonly understood as
a sale of service, the Department would not view a sale of a custom portrait or sculpture by an artist as a nontaxable sale of a service.
Colorado General Information Letter GIL-07-027,12/04/2007. You can view this ruling at
www.colorado.gov/revenue/tax > Tax Library > Rulings > Topic by Number. However, a subsequent sale of such
report by the client to third parties (or the sale of a film by the client to third parties), would likely be viewed as a
taxable sale of property because the service component was performed by the initial seller, not the client.

3

You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.colorado.gov/revenue/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within that
60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

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