Is a jingle house's 'demo fee' — paid for an ad agency's option to buy the rights to a jingle — subject to sales tax?

Plain-English summary

Crushing Enterprises, Inc. is a music "jingle house" — it composes musical jingles for advertising campaigns. For each proposal it delivers a lead sheet (the written lyrics and score) and a demo tape (a nonbroadcast-quality cassette) to an ad agency, and collects a "demo fee" of about $1,000. In substance, the demo fee is a payment for the agency's option to acquire the rights to the jingle. If the agency likes it and exercises the option, it pays a much larger "creative fee," and all rights (including copyright) transfer. If the agency passes, it returns or discards the materials and Crushing keeps the jingle (and the demo fee). The company asked whether the demo fee is taxable.

The Department's analysis turned on what is really being sold.

• The demo fee buys an intangible option. Delivering the demo tape and lead sheet transfers a right to review and evaluate the jingle and an option to buy the copyright and produce it. The $1,000 is consideration for those intangible rights; the tangible tape and paper are merely incidental.
• If the agency rejects the jingle, the demo fee is not taxable. With the materials returned or discarded, there is no transfer of title or possession under § 1105(a), and Crushing performed none of the taxable services in § 1105(c) — so no tax.
• If the agency accepts and exercises the option, the fees are taxable. Then the demo fee and creative fee are receipts from a single transaction in which title to and possession of tangible personal property transfer — a broadcast-quality tape, a finished written score, or the retained demo tape for rerecording — so the total receipts are taxable under § 1105(a).

Modified by TSB-A-90(30.1)S (Oct. 10, 1990). The Department later refined this holding: an original handwritten or typewritten lead sheet or musical score is an intangible "manuscript," not tangible personal property, and it broke out how the demo, creative, and production fees are taxed depending on whether the customer must take the broadcast tape from Crushing or may choose its own producer. Read the two opinions together.

What this means for you

Tax follows what's really being transferred, not the medium it rides on

A tape or a sheet of paper changes hands, but if the substance of the deal is the transfer of intangible rights — a copyright, a license, an option to acquire them — the tangible item can be merely incidental and the charge escapes sales tax. The Department looks past the physical delivery to the true object of the transaction.

An option that's never exercised isn't a taxable sale

When the ad agency rejects the jingle and hands the materials back, nothing is really sold — no title or possession passes, and no taxable service was performed. The demo fee for that unexercised option is not taxable.

Closing the deal can make the whole thing taxable

Once the agency exercises the option and takes a tangible deliverable it can broadcast, the transaction becomes a taxable sale of tangible personal property, and the demo and creative fees are pulled in as part of a single taxable transaction. But the 30.1S modification matters: to the extent the customer is really paying for an intangible manuscript (an original lead sheet or score) — and the sale is properly separated from the tape production — that portion can stay nontaxable. Structure and separate billing determine how much is taxed.

Common questions

Q: Is a jingle house's demo fee subject to sales tax?
A: Not when the agency rejects the jingle and returns the materials — the fee buys an intangible option, with no transfer of title or possession. It becomes taxable if the agency accepts and takes a tape.

Q: Why isn't the demo tape a taxable sale of tangible property?
A: Because the substance of the transaction is the transfer of intangible rights (an option to buy the copyright); the tape is merely incidental.

Q: What changes when the agency buys the jingle?
A: The demo and creative fees become receipts from a single transaction transferring tangible personal property (a broadcast tape or score), taxable under § 1105(a) — subject to the 30.1S refinement treating an original manuscript as intangible.

Q: What did TSB-A-90(30.1)S change?
A: It clarified that an original handwritten or typewritten lead sheet or musical score is an intangible manuscript, and detailed how the fees split between taxable tape and nontaxable manuscript depending on the contract.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1105(c) — taxable services (information, fabrication, installation, storage, real-property services)
• Tax Law § 1101(b)(5) — definition of "sale"

Related Department opinion:

• TSB-A-90(30.1)S (Oct. 10, 1990) — modifies this opinion; treats an original lead sheet or musical score as an intangible manuscript

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a90_30s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (30)S
Sales Tax
May 31, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S890914A

On September 14, 1989 a Petition for Advisory Opinion was received from Crushing
Enterprises, Inc., 157 West 57th Street, New York, New York 10019.
The issues raised by Petitioner, Crushing Enterprises, Inc., are whether its receipts from
"demo fees" constitute receipts from the sale of tangible personal property or any of the services
enumerated in Section 1105 of the Tax Law, and if so, are such receipts subject to the sales tax
imposed under Section 1105(a) or 1105(c) of the Tax Law.
Petitioner operates a business of the type commonly referred to in the music industry as a
"jingle" house. Petitioner creates or composes musical jingles for use in advertising campaigns by
advertising agencies.
Creating a jingle entails the composing and combining of lyrics and a musical score. Upon
creation of a jingle, the lyrics and musical score are reduced to a written piece of paper called a "lead
sheet". Petitioner then produces a "demo tape", which is a nonbroadcast quality cassette recording
of the jingle lyrics with instrumental accompaniment.
Petitioner presents the lead sheet and the demo tape as a job proposal to the advertising
agency client. The advertising agency reviews the proposal for the purpose of determining whether
or not to accept the jingle.
Petitioner generally receives a "demo fee" of approximately $1,000.00 upon delivery of such
lead sheet and demo tape to the advertising agency. The demo fee is, in substance, a fee for the
advertising agency's option to acquire the rights to the jingle.
If, after reviewing the lead sheet and demo tape, the advertising agency chooses to accept the
jingle and exercise its option to acquire the copyright to such jingle, the advertising agency then pays
Petitioner an additional "creative fee" for the creative work. Upon Petitioner's receipt of such
payment, all rights in the work, including copyright rights, are transferred to the advertising agency.
If the advertising agency chooses to not accept the jingle, the advertising agency will notify
Petitioner of such decision and Petitioner will retain all rights to the jingle. Petitioner can then use
or adapt the jingle for a different advertising campaign.
Generally, no copyright rights or rights of use, beyond the right to review the work, are
transferred to or vest in the advertising agency until payment of the creative fee occurs. The creative
fee is usually many times larger than the demo fee. If the advertising agency does not accept the
jingle, then Petitioner does not receive a creative fee but does retain the demo fee.
TP-9 (9/88)

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TSB-A-90 (30)S
Sales Tax
May 31, 1990
The demo has no intrinsic value as it is not of broadcast quality and cannot be incorporated
into a commercial. In accordance with industry practice no permanent rights, including copyright
rights are transferred to the advertising agency upon presentation of the demo tape and the lead sheet
to such advertising agency. Regardless of whether the advertising agency accepts or rejects the
jingle, the demo tape and lead sheet are either returned to Petitioner or discarded by the advertising
agency. Petitioner retains the master tape of the jingle. If the advertising agency accepts the jingle,
the advertising agency will enter into a separate production arrangement either with Petitioner or
with another party to produce a broadcast tape of such jingle.
The providing of a demo tape and lead sheet constitutes only the transfer of an option to buy
the copyrights and other property rights in the jingle created by Petitioner and the demo fees received
are payments for the transfer of such intangible property rights, with the transfer of the tangible
property consisting of the tapes being merely incidental to the transfer of the intangible rights.
Sales tax is paid on purchases of blank cassette tapes and paper, purchases and rentals of
equipment, and studio time used to prepare the demo tape.
Section 1101(b)(4) of the Tax Law defines retail sales as "[a] sale of tangible personal
property to any person for any purpose .... "
Section 1101(b)(5) of the Tax Law defines sale, selling or purchase as "[a]ny transfer of title
or possession or both, exchange or barter, rental, lease or license to use or consume, conditional or
otherwise, in any manner or by any means whatsoever for a consideration, or any agreement therefor,
.... "
Section 1105(a) of the Tax Law imposes on "[t]he receipts from every retail sale of tangible
personal property, except as otherwise provided in this article."
Section 1105(c) of the Tax Law imposes tax on "[t]he receipts from every sale except for
resale, of the following services:
(1) The furnishing of information by printed, mimeographed or multigraphed matter. . .but
excluding the furnishing of information which is personal or individual in nature and which is not
or may not be substantially incorporated in reports furnished to other persons.
(2) Providing, fabricating, processing, printing or imprinting tangible personal property,
performed for a person who directly or indirectly furnishes the tangible personal property, not
purchased by him for resale.. .
(3) Installing tangible personal property. . .or maintaining, servicing or repairing tangible
personal property. . .not held for sale in the regular course of business.
(4) Storing all tangible personal property not held for sale in the regular course of business
...

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TSB-A-90 (30)S
Sales Tax
May 31, 1990
(5) Maintaining, servicing or repairing real property, property or land. . ."
The providing of the demo tape and lead sheet to the customer constitutes the transfer of a
right to review and evaluate the jingle and a right to an option to purchase the copyright and to
produce the jingle for use in a commercial. The demo fee of $1,000.00 represents consideration for
the purchase of such intangible rights and the transfer of the demo tape and lead sheet is merely
incidental to the purchase of the intangible rights.
Accordingly, the demo fee will not be subject to New York State or Local Sales or Use Tax
in transactions where the customer does not accept the jingle and either returns the demo tape and
lead sheet or discards them. The provision of Section 1105(a) of the Tax Law does not apply to such
transactions as there has not been a transfer of title or possession. Moreover, the provisions of
Section 1105(c) do not apply as Petitioner has neither performed nor made a sale of any of the
services enumerated therein.
However, in transactions where the customer accepts the jingle and exercises the option to
purchase the copyright, the demo fee and the creative fee collected from the customer will be
considered as receipts from a single transaction in which the transfer of title to and possession of
tangible personal property occurs. The tangible personal property may be in the form of an air
quality tape, a finished written score or the retention of the demo tape by the customers for the
purpose of rerecording for air quality purposes. Accordingly, the total receipts in such transactions
will be subject to the tax imposed under the provision of Section 1105(a) of the Tax Law.

DATED: May 31, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.