Does a company owe Texas sales tax on fees charged to songwriters for demo placement and to music publishers for catalog/system access?

Subject

Songwriters' Lyrics Catalog And Automated Song Playback System Operated From Telephone — Sold To Music Publishers

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9310L1277G06

Plain-English Summary

A business described a two-sided service built around an automated, telephone-accessed song playback system. On one side, a songwriter provides the words (lyrics) to a song and a demonstration tape; the company places the song from the demo tape onto an automated playback system that can be reached by touch-tone telephone, and charges the songwriter a fee for one year of this demonstration service. On the other side, the company places the songwriter's lyrics into a catalog offered mainly to music industry businesses such as music publishers, and charges those catalog users a fee for one year to receive the catalog plus a system access number that lets them call in and listen to the songs. If a catalog user is interested in a particular song, the company will, at that user's request, connect them with the songwriter. The company advertises an 800 number for people seeking information about the service, and uses a standard local business line for the actual playback calls; callers are not charged on a per-call or time basis for using the playback system.

The company asked the Comptroller whether it should be accruing tax on its fees to songwriters and to catalog users, and if so, at what rate. The Comptroller's response was direct: the company's sales of catalogs and system access are subject to Texas sales tax if the sales are made to Texas residents. The letter instructs the company to collect 7.25 percent state sales tax plus any applicable local use tax of up to an additional one percent, and notes that a bulletin on collecting local sales and use tax was enclosed for reference. The letter also clarifies that no tax is due on sales shipped to out-of-state locations.

As with other Comptroller letters of this type, the response closes by noting that it is rendered based on the facts submitted, and that other facts, though similar, may yield different results.

What This Means For You

If you charge songwriters for demo placement: Under this ruling, that fee is treated as part of the taxable service and sales tax applies when the songwriter is a Texas resident.

If you charge catalog/system-access fees to music publishers or other users: The ruling treats the fee for the catalog and the system access number the same way — taxable when sold to a Texas resident, at 7.25 percent state tax plus up to 1 percent additional local tax.

If your customers are outside Texas: The letter states plainly that no tax is due on sales shipped to out-of-state locations, so out-of-state songwriters or catalog users would not be subject to this tax under the facts described.

Local tax rate matters: The letter flags that the correct local sales/use tax rate depends on guidance in a separate bulletin (referenced but not reproduced in this letter), so businesses in this situation should confirm the applicable local rate for each transaction rather than assuming a flat combined rate.

Q&A

Q: Does the company owe sales tax on the fee it charges songwriters for the one-year demonstration service?
A: Yes. The Comptroller ruled that "sales of catalogs and system access are subject to Texas sales tax if the sales are made to Texas residents," which the letter applies to the fees described, including the songwriter's demonstration fee.

Q: What tax rate applies?
A: Per the letter, the company must collect "7.25 percent sales tax plus any applicable use tax up to an additional one percent."

Q: Is tax due if the catalog or system access is sold to someone outside Texas?
A: No. The letter states "No tax is due on sales shipped to out-of-state locations."

Q: Are the playback system's callers charged tax on their calls?
A: The letter describes the fees actually charged — for the catalog and system access number — as the taxable sales; it separately notes that callers are "not charged for the use of our system on a per call or time basis," meaning there is no separate per-call charge described in the facts.

Q: Does this ruling apply to every similar business automatically?
A: No. The letter states, "This opinion is rendered based on the facts you submitted. Other facts, though similar, may yield different results."

Original ruling text

October 11, 1993

Dear **:

Thank you for your recent letter which is restated in part with
response below.

We are in need of a ruling on how the Texas sales and use tax
applies to our business. Our operation is as follows.

A song writer will provide us with the words (lyrics) and a
demonstration tape of the song they have written. The song from
the demo tape is placed on an automated playback system that can
be operated from a touch-tone telephone.

The songwriter is charged a fee for 1 year of demonstration service.

The lyrics to the song are placed in a catalog and offered primarily
to music industry business such as music publishers. We issue a
number to the users of our catalog that gives them access to our
playback system. They can then call our system and listen to the
songs that are in our catalog.

We charge a fee to provide our catalog and a system access number to
interested parties for 1 year. If the person using our catalog is
interested in a particular song, we will, at their request, place
them in contact with the songwriter.

We advertise an 800 number for potential users of our system to get
information about our service and we use a standard, local business
line for the callers to our playback system. Callers are not charged
for the use of our system on a per call or time basis.

Question: Should we be accruing a tax on our fees to songwriters
and the users of our catalog and if so, at what rate?

Response: Your sales of catalogs and system access are subject to
Texas sales tax if the sales are made to Texas residents. You will
collect 7.25 percent sales tax plus any applicable use tax up to an
additional one percent. I am enclosing a copy of a bulletin giving
guidelines for collecting local sales and use tax for your reference.
No tax is due on sales shipped to out-of-state locations.

This opinion is rendered based on the facts you submitted. Other
facts, though similar, may yield different results.

If you have questions or need more information, please call or write.
You may reach me by calling toll free, (800) 531-5441 (ext. 34680). My
direct line number is (512) 463-4680. The number for FAX transmissions
is (512) 475-0900.

You may write to me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9311192L.3 and/or 9311192L