Is close captioning work performed as part of producing a film or video subject to Texas sales tax, and can the captioner buy tapes tax-free?

Plain-English summary

A close-captioning business asked the Comptroller how Texas sales tax applies to its process. The letter describes that process step by step: dub the master, create a verbatim transcription of the audio, schedule that text to time-code locations on the tape (producing a computer file that drives what appears in the caption window and when), make a client-approval copy, then — once approved — play the edit master while running the video signal through a caption encoder to place the caption data on line 21 of the video signal, recording the result to a new caption master. Both the original master and the new caption master go to the client.

The Comptroller's answer is short and practical: captioning is treated as one of the steps in creating a master film or video, not as a distinct taxable service standing on its own. Because of that, the captioner should have the client furnish an exemption certificate stating that a copy of the finished film or video will be sold, broadcast, exhibited, distributed, or licensed. The letter also notes that, as of October 1, 1993, it no longer matters which party in the production chain is legally the "producer" — someone simply has to either collect tax or obtain an exemption certificate. On the purchasing side, the captioner may issue a resale certificate when buying tapes that will be transferred to the client, and may issue an exemption certificate when buying materials (including tapes) that are necessary and essential to, and used directly in, the captioning process.

What this means for you

Close-captioning and post-production vendors

If your captioning work is part of producing a master film or video (rather than a stand-alone unrelated service), get an exemption certificate from your client stating the finished product will be sold, broadcast, exhibited, distributed, or licensed. That certificate is what supports treating your captioning charge as part of exempt production activity rather than a taxable service.

Purchasing tapes and production materials

When you buy tapes that will physically be handed over to your client (the original master and new caption master), you can buy those tapes tax-free with a resale certificate. Separately, when you buy materials — including tapes — that are necessary and essential to and used directly in the captioning process itself (rather than transferred to the client), use an exemption certificate instead of a resale certificate.

Film and video producers hiring captioning vendors

Because it no longer matters who is treated as the "producer" in the chain (effective October 1, 1993), your captioning vendor may ask you for an exemption certificate covering the production. Be prepared to provide one if the finished film or video will ultimately be sold, broadcast, exhibited, distributed, or licensed.

Common questions

Q: Do I owe sales tax on close-captioning charges I bill to a film or video producer?
A: This letter treats captioning as a step in creating a master film or video rather than a separately taxed service, provided the client furnishes an exemption certificate stating the finished product will be sold, broadcast, exhibited, distributed, or licensed.

Q: Can I buy blank tapes tax-free for this work?
A: Yes, in two different ways depending on use — a resale certificate for tapes that will be transferred to the client (the master and caption master), and an exemption certificate for tapes or materials that are necessary and essential to and used directly in the captioning process itself.

Q: Does it matter whether I or my client is legally the "producer" of the film or video?
A: No. The letter states that as of October 1, 1993, it doesn't matter who is the producer — the point is simply that tax must either be collected or an exemption certificate obtained somewhere in the chain.

Q: What certificate should my client give me?
A: An exemption certificate stating that a copy of the film or video will be sold, broadcast, exhibited, distributed, or licensed.

Citations and references

No statutes or administrative rules are cited by number in this letter. The Comptroller's answer rests on the general sales-tax framework for production of master films and videos and the use of resale and exemption certificates, discussed in plain terms without section citations.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9406L1327A04

Original ruling text

June 10, 1994

Dear**:

Thank you for your entertaining letter on close captioning.

Close captioning involves the following steps:

First you make a dub of the master. Then you create a verbatim
transcription of the audio portion of the tape. Next, you schedule
the transcribed text to the time-code locations in the video tape.
This step determines what text will appear in the caption window
and when it will appear. It results in a computer file. Now you
make another copy for your client's approval. When the client has
approved the product, the edit master is played while running the
video signal through a caption encoder, placing the caption
information on line 21 of the video signal. The altered video is
recorded to a new caption master. The original master and the new
caption master are given to the client.

Captioning is one of the steps in creating a master film or video.
Have your client give you an exemption certificate stating that a
copy of the film or video will be sold, broadcast, exhibited,
distributed or licensed.

As of October 1, 1993, it doesn't matter who is producer, just
collect tax or get an exemption certificate.

You may give a resale certificate when you purchase tapes that will
be transferred to your clients and an exemption certificate when you
buy materials (including tapes) that are necessary and essential to
and will be used directly in the captioning process.

I'll call you next Thursday, and we can discuss the equipment you
use in this process and any other questions I have failed to answer.
My number is 1-800-531-5441 ext. 3-4614. Or you may write to the Tax
Administration Division.

Sincerely,

Adina Whittemore
Tax Administration Division

NOTE: Previous Accession Number 9406764L