When a theater receives movies from studios, is the rental taxable -- and does it matter whether they come by satellite or on a hard drive?

Plain-English summary

A multi-screen movie theater receives films from studios in two ways and asked whether either rental is taxable:

• By satellite transmission (or otherwise electronically), with no tangible property received -- NOT taxable. These rentals are treated as sales of intangible property, consistent with rulings on electronically delivered videos, photographs, and digitized music (Google, TSB-A-08(22)S; Timm, TSB-A-05(34)S; Universal Music Group, TSB-A-01(15)S; Publication 28). No tangible personal property changes hands, so there's nothing to tax under 1105(a).
• By hard drive loaded into the theater's server -- TAXABLE. When the studio sends a hard drive (which the theater then unlocks with a separate electronic key to show the movie for a designated period, and later returns), the theater is renting tangible personal property. The hard drive is tangible personal property under 1101(b)(6) regardless of the fact that a separate key is needed to convert the digital data into a viewable movie. So the rental is taxable under Tax Law 1105(a) (Apple, TSB-A-07(11)S; Stachura, TSB-A-04(26)S).

For the theater's described rentals, delivery by satellite or otherwise electronically was treated as a sale of intangible property; delivery on a hard drive to the theater in New York was a taxable rental of tangible personal property. The opinion also says movie rentals in a tangible format are taxable unless otherwise exempt.

What this means for you

Theaters renting movies from studios

For the rentals described here, check whether the theater receives only an electronic transmission or receives the movie on a physical medium. A hard drive delivered to this theater in New York was taxable even though a separate electronic key was needed to play the movie. The opinion recognizes that a tangible-format movie rental could be otherwise exempt.

Common questions

Q: We receive movies by satellite -- do we owe sales tax on those rentals? A: The opinion says this theater's movies delivered by satellite or otherwise electronically, with no tangible property received, were nontaxable rentals of intangible property.

Q: A film arrives on a hard drive but needs a separate key to play. Taxable? A: The opinion held that the movie delivered on a hard drive to this theater in New York was taxable under § 1105(a) despite the separate activation key.

Citations and references

• Tax Law section 1105(a) (sales of tangible personal property)
• Tax Law section 1101(b)(6) (tangible personal property)
• TSB-A-08(22)S (Google Inc.) (videos delivered electronically)
• TSB-A-05(34)S (Martin R. Timm) (photographs delivered electronically)
• TSB-A-01(15)S (Universal Music Group) (digitized music)
• TSB-A-07(11)S (Apple Computer, Inc.); TSB-A-04(26)S (Debra Horn Stachura)
• Publication 28, A Guide to Sales Tax for the Film Industry

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a10_27s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(27)S
Sales Tax
June 29, 2010

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S100422A

On April 22, 2010, the Department of Taxation and Finance received a Petition for Advisory Opinion from name and address redacted. Petitioner asks whether movies received by Petitioner from film studios and distributors by satellite or other electronic means are subject to sales tax. We conclude that movies received by satellite are not subject to sales tax. Movies received in a tangible format are subject to tax. Facts Petitioner operates a multi-screen movie theater in New Hartford, New York. It receives movies from film studios in one of two ways. The first is by satellite transmission from the film studio. In this case, no tangible personal property of any kind is received by Petitioner either within or without New York State. The second is by receipt of a hard drive that is loaded into a server. The hard drive contains digital information only. This digital information is converted into a viewable movie only after the theater receives an electronic key from the film studio that enables the movie to be shown for a designated period of time. The hard drive is returned to the studio, sometimes before the end of the designated period. Analysis Petitioner’s rentals of movies delivered by satellite transmission or otherwise delivered electronically are not subject to sales tax. These rentals are considered to be sales of intangible property. See Google Inc., Adv Op Comm T&F, May 2, 2008, TSB-A-08(22)S (videos delivered electronically); Martin R. Timm, Adv Op Comm T&F, September 27, 2005, TSB-A-05(34)S) (photographs delivered electronically); Universal Music Group, Adv Op Comm T&F, April 18, 2001, TSB-A-01(15)S (digitized music); Publication 28 (5/05) A Guide To Sales Tax for the Film Industry, at 11. Rentals of movies in a tangible format such as tapes or disks are subject to sales tax as sales of tangible personal property, unless otherwise exempt. See Apple Computer, Inc., Adv Op Comm T&F, April 12, 2007, TSB-A-07(11)S; Debra Horn Stachura, Adv Op Comm T&F, November 22, 2004, TSB-A-04(26)S; Publication 28, supra. When Petitioner rents a movie from the film studio by receipt of a hard drive, Petitioner is purchasing the movie in a tangible format. The hard drive is tangible personal property regardless of the fact that Petitioner must receive an electronic key to convert the digital

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TSB-A-10(27)S
Sales Tax
June 29, 2010

information on the hard drive into a viewable movie. Accordingly, rentals of movies to Petitioner by delivery of a hard drive to Petitioner in New York are subject to sales tax under Tax Law §1105(a).

DATED: June 29, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set forth therein and is binding on the Department only with respect to the person or entity to whom it is issued and only if the person or entity fully and accurately describes all relevant facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect as of the date the Opinion is issued or for the specific time period at issue in the Opinion.